Oil Market Structure

Oil Market Structure Detail the Current Market Structure The current market structure of Oil Company X is oligopolistic market structure. This is a market structure with a few large competitors offering the same product (Tucker, 2010).

Companies from oil-producing countries control the largest market share, followed by Oil Company X. The two companies control more than 60 percent of the market share. Other companies in the industry share less than 40 percent of the market share.

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OIL MARKET STRUCTURE

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The Anticipated Market Structure With the firm X taking over the complete control over the pipeline production market, the future market structure will change to the monopolistic market structure. The local firms will not able to compete with the Oil Company X, while trade restrictions will hinder OPEC companies from accessing the market, creating a monopoly. Furthermore, new entrants in the industry may find the initial cost prohibitive to break-even in the industry leaving company oil X as the only firm in the industry.

Characteristics of the Oligopolistic Market Structure Factor

Description

Number of

They are a small number of competitors, and

Oil Company X with OPEC

competitors

the market is dominated by large firms

companies currently

(Tucker, 2010).

dominates the market in terms of market share.

Barriers to entry

High barriers to entry since large firms

After the completion of the

usually have control over the source of raw

pipeline, Oil Company X

materials and have financial, infrastructural

will have huge

resources, and patents rights hence locking

infrastructural resources that

out new entrants (Tucker, 2010).

will make it difficult for new competitors to penetrate the market.

Price sensitive

Buyers are price sensitive hence increase in price over what buyers can bear leads to shift towards substitute products. Moreover, competitors also monitor the price of each

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other. If one competitor lowers their price, others may retaliate by reducing price with a huge percentage, hence all making a loss. On the other hand, one seller cannot increase the price since customers will shift to competitors.

Homogeneous

All the firms sell the same products (Tucker,

Company Oil X is selling

products

2010).

the same product as competitors.

Cooperation on

Firms in the industry agree to sell at the same

prices and price

price. An example includes the OPEC cartel

leadership

where the involved countries have a contract to sell hold down output to increase the price.

In other situation, one firm can take the responsibility of setting prices which others have to follow to make profits and stay in business (Tucker, 2010).

Characteristics of Monopoly Market Structure Factor

Description

Lack of substitute products

Company Oil X will be the only supplier of the oil

Barriers to entry

With control over pipeline production market, there is strong control over the distribution channel.

Price Maker

With control over the market, Company Oil X will

OIL MARKET STRUCTURE

4 decide the price.

Profits

Various options exist, such as profit-maximizing, revenue maximizing and loss-making. Company oil X will be a profit-maximizing monopolist.

Changes in the Firm’s Pricing Strategy after the Change in the Market Structure When the market structure changes to a monopoly, Company Oil X will be the price maker. This will enable the company to adopt a profit-maximizing pricing strategy. With profit maximizing pricing strategy, marginal revenue (MR) is equal to marginal cost at point C. Any quantity additional quantity produced below the marginal revenue curve increases profits while any quantity above the marginal revenue curve does not increase the profits. Adopting a profitmaximizing pricing strategy means the company can only control one variable at a time, price or quantity. To maximize profits, the monopoly firm will only control the price. In oligopolistic market structure, companies aim at revenue maximization. In this case, they produce more to sell more at a small profit. In a monopoly, the company will restrain from producing Q0 units to maximize revenue, rather, it will produce less units Q1 maximize profits.

The profit-maximizing pricing strategy of Company Oil X

B

P1 P0

A MC =AC C

D MR Q

Q

OIL MARKET STRUCTURE

In conclusion, at price P1 and quantity Q1, the company will maximize its profits. Beyond this quantity, the company may even operate at a loss.

5

OIL MARKET STRUCTURE

6 Reference

Tucker, I. B. (2010). Microeconomics for Today. Mason, OH: South-Western Cengage Learning.