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August 16, 2012

Essay Paper on Game Theory and OPEC

The explicit objective of the Organization of the Petroleum Exporting Countries (OPEC), is to protect by all means, the interests of the alliance that it consists of. The alliance understands the position of power that it has due to the commodity that it possesses; black gold.  Since the 1960s, when the idea had been proposed for a cartel to be made in order to control the market, its influence may have lessened, but OPEC still remains staunch on ‘harnessing’ oil to benefit itself.
     As defined by, “cartel is a group of firms or nations who attempt to control price or supply of a commodity (such as oil) through mutual restraint on production.”. Narrowing down this definition on OPEC; the countries are the ‘firms’, and OPEC is a cartel. Cartels are slightly different from oligopolies, according to the definition by MoneyTerms, “an oligopoly the domination of a market by a few firms.” The difference between an oligopoly and a cartel is that oligopolies don’t necessarily have to be in a formal agreement whereas the purpose of cartels have to be explicit.  Examples of oligopolies include the oligopoly created by the three wireless companies which are dominant in much of Canada; Rogers Wireless, Bell Mobility and Telus. Monopoly on the other hand, is the dominant control of market by a single seller in a certain region, this type of economy can be one of both, legal or illegal, for instance the legally created British East India Company, 1600, or a sole importer or manufacturer of any product in a certain country or region.
     Monopolies do not work for the welfare of society in general. The motive of any monopoly market can usually be deemed selfish to the least. Oligopolies work in a similar fashion, but because there is no formal agreement between the sellers to set prices, there is still a lot of room to benefit the buyers in general. In contrast to a monopolistic market where products are usually unique, the products sold in an oligopolistic market are similar to each other which ultimately results in setting a lower price to products, thus benefitting the buyer. Also, the barriers to entry are not very high, due to which new players can enter the market and further help to increase competition; again giving an edge to the buyer. Rising competition then results in innovation and better service to the customers, in order to distinguish one seller from the other; a form of non-price competition.
     The Game Theory helps explaining the interactions of firms within oligopolies and cartels. In Nash Equilibrium, where, in a given situation, the strategies proposed are equal in terms of their response to other strategies, it doesn’t leave any party much choice to tread on a path other than the one which is given as a response to the strategies. Similar is the situation in oligopolies and cartels; the firms come up with the best of strategies and apply them in oligopolies, or regulate them in the case ofcartels.
     The economic purpose of OPEC, is to serve its constituent countries, by establishing a multilateral platform, in order to make sure that its grip over the oil market does not losen. Fortunately, the hold of OPEC has been reduced due to springing up of other cartels, such as Organisation for Economic Co-operation and Development (OECD) which are do not entirely consist of oil producing countries, but high income economies, whose aim is to lessen their dependency on OPEC, and weakening its prevalent grip on the oil market through mutual help. Also the discovery of oil reserves in Canada, Alaska and Gulf of Mexico has slashed the importance of OPEC. Nevertheless, it still remains much powerful than its adversaries.


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