Perhaps the most famous example of oligopolistic collusion is the Organization o
ID: 1226320 • Letter: P
Question
Perhaps the most famous example of oligopolistic collusion is the Organization of Petroleum Exporting Countries (OPEC). During the 1970s, this cartel, which controlled much of the world supply of oil at the time, was able to control output and significantly raise world oil prices.
1. OPEC nations as a group would make more profit from oil if they restricted the supply and thus sold less but at a higher price, as the demand for oil is relatively inelastic. If that is true, why has it been so difficult for OPEC to keep its members from cheating (and selling more oil than agreed on)?
2. Another factor that has weakened OPEC control is oil discoveries in other countries, induced in part by expected profits due to high prices. How does this increased supply of oil reduce OPEC’s ability to set world oil prices?
3. Would it be possible for United States oil companies to form a cartel to attempt to raise United States oil revenues? Explain.
Explanation / Answer
1.
Yes,this infact is true.However, the desire to ern profits individually is what breaks the cartel.When a cartel reduces output and increases prices, some member countries have the incentive to produce more than decided and thus increase the output.As the number of membe countries who go on cheating increases it becomes lesser and lesser profitable to keep the output reduced.When the cheating member increases output it ends up hurting other cartel members.Since, the cheating members produces more the market demand would naturally shift towards the cheating country.