Answer to Question #103648 in Macroeconomics for Z NEMASETONI

Question

What do you think is the main reason for joining and termination of membership by
countries in OPEC? (To answer this question, reference must be made on the
characteristics of Oligopoly and its demand curve.)

Answer 1

OPEC is an international commodity cartel, one of the options for creating an oligopoly, where the best strategy for an oligopoly is to conspire with competitors about production prices and production volumes. The main goal of the organization is the regulation of prices for black gold in the world market. Countries included in the association list control up to 2/3 of all oil fields, which allows dictating conditions to other market participants. One of the main tools for the influence of OPEC on the oil market is the allocation of production quotas. When discussing the next change in quotas / maintaining the previous volumes, take into account:

• production capacity.

• historical production volumes.

• domestic oil consumption.

• production costs and population.

• dependence on oil exports.

• availability and size of external debt.

Reasons for joining OPEC: it is economic protection on the world oil market, the ability to resist major monopolist players in the world oil market, the ability to dictate terms and maximize profits, all this is achieved through a legislative conspiracy between OPEC participants. This is a typical oligopoly.

Consider the nature and consequences of the activity of the cartel on a graphic model.

Two firms compete in the market (the situation of duopoly), market demand is constant and has the form of a linear function, firms produce homogeneous products and have the same costs. Given these assumptions, the cartel model can be represented in the following figure:

Chart 1. Cartel Model

If firms are in a state of fierce competition, then the lowest possible price is equal to the competitive price (Pc) and is determined by the intersection of the demand curve D and the marginal cost curve of the MS. At the price of Pc, duopolists (like perfect competitors) will have zero economic profit in the long run.If the firms in question form a cartel and limit their output to maximize total profit in the amount of Qm, then the optimal cartel price (monopoly price) will be Pm. This is the maximum possible price at a given market demand for the proposed volume, which provides monopoly profits to cartel participants.

Since the total profit of the enterprises united in the cartel is higher than initially, they are interested in such an agreement. The OPEC cartel works in a similar way.So, some countries may experience problems with budget liquidity, have huge public debt, which does not allow paying for OPEC membership. Small OPEC participants realize that membership in the cartel does not give them any particular advantages, since their influence on the overall results of reduced production is negligible. In addition, there are also many reasons for the exit: a country can reorient to the extraction of gas and other minerals, some countries do not agree with a reduction in oil production, since the economies of these countries are dependent on oil exports.