Oligopoly

Discussion on “OPEC Production Cut Surprises the Market” by Stanley Reed (Business Week, September 2008)

The article discusses OPEC, one of the world’s largest cartels, decision to cut oil production in 2008. The decision was made in order to keep oil prices at over $100 per barrel. The article also focused on Saudi Arabia’s history of overproducing beyond the cartel’s set oil production levels. The article is relevant to oligopolistic competition, because cartels are usually formed in this kind of market. Moreover, it discusses how certain players in an oligopoly (i.e. Saudi Arabia) do their best to maximize their own profits under this scenario.

While it may be easy to argue that OPEC is unethical in its form of competition, the issue is more complicated than that. OPEC member countries often do not value free market competition which focuses on consumer benefit, in the same way that the United States does. Moreover, price fixing in the oil industry can stimulate the speed at which alternative energies become commonplace. OPEC’s actions often do not have their intended effect. Time and time again, member nations have deviated from their agreement in order to maximize their own profits.

Another example of oligopolistic competition is the investment banking industry. A few top firms determine similar rates for things like Initial Public Offerings. For some reason, smaller banks have not been able to break into the industry, and the few banks that are in the industry act as price makers.

Posted by Airi, Ryan and Magan (Section 4)

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