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Chapter 10: Q. 18 (page 253)

When OPEC raised the price of oil dramatically in the mid-1970s, experts said it was unlikely that the cartel could stay together over the long term鈥攖hat the incentives for individual members to cheat would become too strong. More than forty years later, OPEC still exists. Why do you think OPEC has been able to beat the odds and continue to collude? Hint: You may wish to consider non-economic reasons.

Short Answer

Expert verified

After 40years, OPEC has been able to beat the odds and continue to collude because of the nature of demand curve i.e. kinked demand curve which causes a very little increase in quantity sold. OPEC countries have also an advantage of natural resources.

Step by step solution

01

Step 1. Incentive to cheat

Firms in an oligopoly can collude and form a cartel to act like a monopoly market and keep the quantity low and price high. Since, such agreement is generally not legal, there is a very high chance of cheating.

02

Step 2. Reason for still existing OPEC

The non-economic reason for the countries not cheating and breaking away from the cartel is because they are not only a collusion but they also act as a strategic alliance between these oil producing and exporting nations and cater to their broad interests. These countries also have cultural, regional, and religious similarities, which can also be another reason for cooperation.

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Most popular questions from this chapter

Does each individual in a prisoner鈥檚 dilemma benefit more from cooperation or from pursuing self-interest? Explain briefly.

Consider the curve in the figure below, which shows the market demand, marginal cost, and marginal revenue curve for firms in an oligopolistic industry. In this example, we assume firms have zero fixed costs.

a. Suppose the firms collude to form a cartel. What price will the cartel charge? What quantity will the cartel

supply? How much profit will the cartel earn?

b. Suppose now that the cartel breaks up and the oligopolistic firms compete as vigorously as possible by cutting the price and increasing sales. What will be the industry quantity and price? What will be the collective profits of all firms in the industry?

c. Compare the equilibrium price, quantity, and profit for the cartel and cutthroat competition outcomes.

Make a case for why monopolistically competitive industries never reach long-run equilibrium.

Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it supplies?

Continuing with the scenario in question 1, in the long run, the positive economic profits that the monopolistic

competitor earns will attract a response either from existing firms in the industry or firms outside. As those firms capture the original firm鈥檚 profit, what will happen to the original firm鈥檚 profit-maximizing price and output levels?
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