Archive formonopoly

OPEC to reduce oil production

This article is about OPEC members, acting as a cartel, under Saudi Arabia’s coercion, try to reach a deal on cutting on production.

The organization pledged to remove 1.2 millions barrels of oil a day from global oil production if non-OPEC countries, like Russia, increase their production.

This action will eventually lead to a rise in the oil price to above $50, even above $60 within weeks, per barrel due to a great decrease in the supply of oil, as much as 2% of global production. It may mark the beginning of the end of a two-year glut in the world’s oil market.

Since September, Saudi Arabia’s oil minister and his Iranian counterpart have been engaging in a game of brinkmanship that, if failed, would push the price of oil below $40 a barrel. However, Saudi Arabia was wise enough to realize that pragmatism is the best choice, so it chose to cut down 4.6% of its oil production, and so did other OPEC members.

The cut will take effect on January 1st, and it will greatly reduce the global oil inventories next year. Non-OPEC output has fallen this year, adding more impetus to the cartel’s efforts. If oil production decreases and oil price increases, America shale producers will have the incentive to produce more output, but their ability to produce low-cost oil has been exaggerated, so this may not happen as very swiftly and easily as it is said. Nonetheless, many shale producers have been standing still, despite OPEC’s many efforts to kill them. The cartel, after all, haven’t been able to declare even a Pyrrhic victory from the past two years.


Airline Oligopoly

The airline business has been effected severely by the Obama administration. The administration allowed for many of the businesses to merge together in order for the airline business to be made up of 4 primary airlines. Continental was taken over by United, American was taken over by US Airways, and Delta took over Northwest. Due to the merging of these companies, an oligopoly was formed between the 4 primary airlines. This lead to many issues such as a decline in customer satisfaction. New fees appeared, seats became less comfortable, leg room room disappeared, and higher fares appeared. In the future, the airline oligopoly is only predicted to become stronger. Virgin America would be the deciding factor if the airline were to be taken over by one of the primary 4. With more companies there is higher competition. This leads to a higher incentive for companies to create the most quality experience for their consumers. However, due to the oligopoly, there is way less competition and therefore less incentive for companies to attempt and outperform their competitors. Conclusively, the oligopoly in the airline business can only lead to less and less desirable flying experiences.

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Meat Industry Monopoly

Although it seems like there are various sources for one to choose their meat from, the meat industry is one large monopoly. In America, “Four companies make 85 percent of America’s beef and 65 percent of its pork. Just three companies make almost half of all chicken.” Companies such as Tyson and Cargill Inc. are able to control the supply of meat by owning every mean of production. For example, Tyson owns the breeding company where birds are raised, the hatcheries where chicks are born, the feed mills that are used to fatten chicks up, the slaughterhouse where the birds are processed, and the trucking that helps deliver the meat. Since Tyson Food, is able to control the means of production they are also able to control the price.

Due to this monopoly, meat prices have been climbing. In 2008, the meat industry was experiencing a number of set backs which affected chicken consumption. In order to solve this issue, Tyson associates decided “They needed to cut back production to keep chicken supplies lower. That would soon help drive prices up.” Although this change hurt the company for the first few weeks, it eventually worked to their benefit. In a matter of weeks, the price of boneless chicken rose by 20 cents(and is still climbing) and Tyson Food was profitable again. By Tyson being able to create high barriers to entry by controlling the means to production and drive prices up, proves that Tyson Food is a monopoly.

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Liquor Monopoly of Maryland

As one of the few remaining jurisdictions under “control” laws, local citizens and businesses of Montgomery County in Maryland are extremely limited when it comes to finding vendors of alcohol. Under the law, the state government is the only operation allowed to take ownership and distribute spirits with limited vendors able to sell beer and wine. Due to the control law, all other potential vendors are restricted from the industry. The law creates a barrier to entry and gives the government the power of a monopoly. The article goes to explain the complications of the monopoly in detailing its dysfunctions in delivery, customer service, and poor selection. However, the Department of Liquor Control (DLC) is unfortunately and absolutely allowed to run their business as inconveniently as possible as they have no competition to lose customers to under the power of their monopoly.

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Switching Cost Of Phone Providers

The article, The High Cost Of Loving Your Phone, by Damon Darlin outlines the ideas of how firms in oligopolies and monopolistic competitive markets use high switching cost to ensure that it keeps its customers from switching from itself and to another supplier. It does so by showing that consumers have a hard time switching from one phone provider to another because A, the consumers has non-transferable messages, photos, and a number that holds ‘priceless’ memories, or B, there is a social standard that a customer may be switching from. One the contrary, It also shows an example where a switching cost is eliminated (previously consumers weren’t able to keep their phone number when they switched, but now they are able to), and how a large majority of individual firms responded (They lowered their prices because now the market resemble more of a competitive market rather than a monopolistic competitive market). Ultimately, Loving one’s phone is costly because of the high switching cost associated with phones, and the fact that a new and better phone that a consumer may wish to have (but can’t because of switching cost) may be release from a another providers.

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Organic food labeling and pricing – Monopolistic competition and elasticity

The article examines a new trend of food consumption in the U.S. As people become more conscious of their diets, a new market has been created with foods that are labeled organic according to the USDA’s standards. There are a couple of economic concepts seen in this growing market.

  1. Monopolistic competition: The first producer who utilized the desire for organic foods and put a label on organic foods to separate it from other foods in the market successfully started this new market They probably had monopoly power for a short amount of time at first. But now it has turned into monopolistic competition because since the cost of entry is low, more and more sellers come into the market. The foods sold by each producer are still slightly different from each other, giving the firms the monopolistic characteristic even though there are many firms in the market. Each firm faces a downward demand curve, but all firm’s demand curve are currently shifting to the left because many other firms are constantly entering the market of organic foods. This is a fairly new market and the demand curves and prices are still shifting, while nothing is settled yet, this seems to be the current general trend.
  2. Inelasticity of demand: The sellers are still selling at a price above marginal cost and they can cut down production and raise the prices because there is an inelastic demand for organic products. The author stated that people are willing to pay up to 100 percent more for organic produce. High prices and small quantity supplied can be seen easily in stores. The price of organic foods are often higher than normal foods but it is also valued more, and organic foods are more difficult to find whereas normal grocery are found easily in neighborhoods.



GMO seed monopoly

In this article by Ken Roseboro, the oligopoly in the seed industry (the article says monopoly but it is 4 companies controlling 80% of the US corn market and 70% of the soybean market, so in terms of what we’re learning in class I will use “oligopoly”) is discussed and explained. When 40% or more of an industry is being controlled by four companies, the industry is not competitive anymore. Since these companies have so much market power, they are able to set higher prices and lower choice options. When farmers try to save their own seeds and not buy gmo seeds from the oligopoly, they can’t compete; many don’t even have the option. This oligopoly is dangerous because there is little diversity in these types of seeds and potentially they could be wiped out rapidly if such an event were to occur. In other countries such as brazil has split up the one company that was controlling seeds into 13 smaller companies that now can compete with one another, this increases consumer surplus and makes a society more productive.


How does big data create monopoly?

In the article “Big data is coming for your purchase history – to charge you more money“, the author talks about what role does big data play in price discrimination, and how does that give sellers market power that is greater than traditional monopolists.

Based on the extent to which a market is segmented, price discrimination can be ranked in three degrees. Group pricing, or third-degree price discrimination, divides the market in segments and charge the same price in each one. For instance, students are distinguished from adults by their student ID cards and are charged lower price in cinemas. Group pricing is an attempt to simplify the diverse market and is not very accurate. Product versioning, or second-degree price discrimination, uses slightly different versions of the same product to let consumers differentiate themselves. The difference can either be in quantity or quality of the product. For example, businesses usually have higher discount than individuals when they buy products in bulk. Operating systems usually have business version and personal one.

Perfect price discrimination, or first-degree price discrimination, allows a seller to charge the maximum willingness of each buyer. With big data, this has become possible. Netflix, for instance, has increased its profit by 1.4%, using data from web browsing history to recommend different streaming services to different users at  different prices. With enormous data collected from consumers’ browsing history, a market of one is created. Each consumer now face a far more knowledgeable and sophisticated seller.

Because big data allows a seller to charge personalized price, even a seller in a competitive market can become a price setter, just like a traditional monopolist. Maybe, one day market price will no longer matter since every single person is charged a personalized price that can be changed in a millisecond.



Chicken Waste and Water Pollution

Chicken waste and water pollution

The  factory production drove down the chicken prices and made chicken accessible to more people. So over past 50 years, the chicken consumption has nearly tripled.  However, the chicken is produced with significant external costs. The poultry manure from raising chickens cause health problems for people. The companies do try to eliminate the animals’ waste by spreading it in open fields or croplands. The problem is that chicken farms have much more manure than can be used for local crops. The large amount of chicken waste is washed off the land into local streams and rivers; therefore, causing the health problems for people because those chemicals from poultry sometimes leak into drinking water.

The cost of producing chicken is much more expensive when the buyers and consumers will take the external costs into account. The private cost + externalities= social cost curve. The private cost of producing chicken is much less than social cost, the cost that everyone else must bear (health problems, payment for medicaments and cure).  Since there are external costs, the market equilibrium for chicken no longer maximizes social surplus (consumer surplus + buyer surplus+ everyone else surplus). The social surplus is maximized at efficient equilibrium, which can be found at intersection of social cost curve and demand curve. As we can see, at the efficient equilibrium there is less quantity produced than at market equilibrium. (The quantity of good consumed is more than the optimal quanity in a market that internalized all costs and benefits).


Is Amazon A Monopoly?

In the article Is Amazon A Monopoly? By Sergio Hernandez and The Week, opposing viewpoints argue against each other on if Amazon is “a monopoly”. One viewpoint suggests that Amazon has “achieved a level of dominance that merits the application of a very old label: monopoly.” It suggests that Amazon undercuts its competitors, squeezes suppliers, and punishes those who seek to undermine it. This viewpoint seems to believe the Amazon has achieved a natural monopoly where it’s a far more efficient and known suppliers than any other “online” supplier. However, the key word there is “online” for an opposing viewpoint suggesting that Amazon can’t be a monopoly. This viewpoint suggested that while Amazon dominates online, it can’t be considered a monopoly because it competes with grounded stores such a Walmart, Target, and Home Depot. It claims that though Amazon has a large part of the market in a specific areas, online, it’s can’t be considered a monopoly because these other suppliers affect the market price of goods even though they are not online.

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