Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

 
OPEC : 
 
 
OPEC is an example of Oligopoly since few countries control the 
production of oil, the steel and the automobile industry in United 
States of America is another example.
OPEC acts as a cartel. If OPEC and other oil exporters did 
not compete, they could ensure much higher prices for prices for 
everyone. 
Output quotas of its members produced staggering price 
increases (from $1.10 to $11.50 per barrel in the early 1970's, and 
up to $34.00 in the late 1970's: an increase of 3400% in ten years). 
The relative success of OPEC can be attributed to the following 
advantages 
it 
has 
enjoyed 
relative 
to 
other 
cartels: 
1. The low price elasticity of oil demand implies that moderate 
output restrictions increases price in short run - a favourable 
environment 
for 
a 
cartel. 
In 
1973, 
OPEC 
output 
contributed two-thirds of the total world oil production. 
2. In1975 OPEC countries had a substantial market power of 70 %. 
3. The effectiveness of OPEC is further enhanced since just four 

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countries (Saudi, Arabia, Kuwait, Iran and Venezuela) regulate 75% 
of OPEC‘s oil reserves, 
4. Exploration, production and building new supplies is time 
consuming and this mitigates the threat of any challenge to OPEC 
from increased production by non members. 
5. Policies of oil importing nations like US have benefited 
OPEC e.g. Low prices discouraging production and exploration; 
environment restrictions. 
1.2 COURNOT'S MODEL: 
 
The Cournot‘s model, the oldest and the most famous of the 
oligopoly theories, was introduced by the French and 
mathematician Augustin A Cournot in 1838. Strictly a duopoly 
theory, it provides valuable insight into the nature of oligopolistic 
interdependence. Although crude, it is certainly a path-breaking 
theory. 
Cournot begins his analysis with the basic assumption that 
duopolist A believes that duopolist B will not change his output 
whatever A may do. Similarly, B believes that A will not change his 
output whatever he may do. Cournot supposes that A and B are 
two producers who own identical mineral water wells, located side 
by-side. Mineral water from these wells can be bottled and sold 
without cost. Thus, the second assumption is that there is no cost 
of production and, therefore, we have only to analyze the demand 
side. 
Cournot's solution is illustrated in Fig 1.1 DB is the market 
demand for mineral water. Further suppose that OA = AB is the 
maximum daily output of each well. Thus, if the total output of the 
two wells is put in the market, the price will be exactly zero. 
Suppose producer A enters the market first. He will produce OA 
output and sell it for the monopoly profit-maximising price OC per 
bottle. His total profit is OACP, the maximum possible because at 
output OA, MR = MC = O. The elasticity of market demand at this 
level of output is equal to unity and the total revenue of the firm A 
is maximum. When cost is zero, maximum revenue implies 
maximum profits also. Now let us suppose that B also enters the 
market. Since A is selling OA output and assuming that he will not 
change his output, the best B can do is to regard PB as his 
demand curve and produce AH (½ AB). At this output, MC = MR = 
O. Total supply now becomes OA + AH = OH and price per unit 
now falls to ON. Total profit falls to OHQN of which A's share is 
OAKN and B's is AHQK. 

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