A monopoly is an economic term that describes a market (product or service) that is owned by one seller and has many buyers. In contrast, an oligopoly is a market that is owned by a few sellers and any action of these sellers would result in the market price fluctuating; while also affecting the price of the competitors’ a well. A cartel can occur in an oligopolistic economy. It is a formal agreement among independent organizations that creates control over both the production and distribution of a product or service; thus limiting the competition.
An example of a current day monopoly is DeBeers, the diamond mogul, which controls the majority of the world’s diamond markets. There are many examples of oligopolies today. According to Lori Alden, “automobile, tire, cigarette, airline, and steel industries are examples of oligopolies” (2007). Oligopolies make it difficult for others to compete due to their large factories and budgets, as well as their patented products and their control over raw materials (2007). According to Benjamin Zycher (2008), OPEC can be considered a cartel.
OPEC can be classified as a cartel because it is comprised of a group of producers that attempt “to restrict output in order to raise prices above the competitive level” (p. 1). The government support of monopolies can cause price fixing in essential industries such as the agricultural industry. Other examples of government-supported monopolies include the “exclusive ownership of cable television operating systems in most markets, for the exclusive franchises of public utilities and radio and TV channels, for the single postal service” (Stigler, 2008).
Monopoly reduces the collective economic welfare because it raises the price above competitive level, thus costumers buy less product; leading to less product being produced. Steve Hannaford believes oligopolies lessen a small businesses chance for success (2007). The welfare effects of oligopolies are such that society suffers from decrease in income because all the corporations are taking business opportunities away from the average Joe. What is Game Theory? Game theory is the theory of competition in which there are winners (gains) and losers (losses) among the opposing players.
More specifically, general equilibrium theory is a specialized branch of game theory dedicated trade and production strategies and involves a large number of individual consumers and producers (Levine, n. d. ). Levine (n. d. ) explains the difference between game theory and general equilibrium theory: In recent years, political economy has emerged as a combination of general equilibrium theory and game theory in which the private sector of the economy is modeled by general equilibrium theory, while voting behavior and the incentive of governments is analyzed using game theory (p. 1).