1. DD209 Running the Economy Block 4 Microeconomics
Regulating markets,
promoting growth

2. TMA04 requirements 1600 words essay Theories Drawings Discussion
References
14 March 2017

3. Block 4 – TMA04
Relevant material covered in Block 4 include Chapters 13 & 14 & tutorials for Weeks 19 & 20, covering theories of behaviour of firms & industries in perfect competition and in markets with market power.
You may find it helpful also to look back at Chapters 11 and 12 and the online material for Weeks 17 and 19 which introduce the modelling of firms’ costs and competitive markets.
Your aim in this TMA is to write an essay to evaluate how changes in the global oil market through breaking entry barriers have affected the power of large oil multinational firms.

4. Market structure
A change in market structure manifest itself in the form of price, quality and quantity of products for consumers.
Different types of market structure include:
Perfect competition
Monopolistic competition
Oligopoly
Duopoly
Monopoly.

5. Market Power
Market power arises when there is less competition and consumers have less choices for substitutions. For example from doing business under perfect competition to monopolistic competition, oligopoly, duopoly and monopoly, firms will have greater control over the price.
Market power is represented by downward sloping demand curve, illustrating inverse relationship between price changes and quantity.
Market power (P > MC). See: (Text, Ch. 14, Section 2.1).

6. Oligopoly Text, P. 161 Two Characteristics of oligopoly:
Barriers to entry: brand loyalty, high switching costs, high capital requirements, imposition of regulations, etc.
Interdependence: Action & reaction amongst players, e.g., change in price will have reaction by other firms. Firms may compete or collude

7. Collusive Oligopoly: Cartel (OPEC)
Oligopolists like to restrict entry to form cartels & earn monopoly profits.
P, C, R AC = MC G PM PC
D = AR MR
QM Quantity QP
Source: Santos, C. et al (2014)
By colluding (market power) firms are able to restrict output at QM to dictate a higher price at PM & hence maximise profits (area 0QMGPM) similar to a monopolist.

8. Oligopoly (cartel) However:
a) competition laws in the western world prohibit explicit agreements among oligopolists as a matter of public policy.
b) existence of abnormal profits will attract other firms to enter the market, particularly if the market is contestable.
In the extract, players in this oligopolistic market structure include the incumbents (OPEC), large oil multinationals and new entrants American Shale-oil producers.
We note that the existence of supernormal profits in global oil industry has attracted a large number of smaller firms to enter this industry.

9. Application
For example, by breaking the entry barriers through innovative fracking technology, American shale-oil producers has made the oil market contestable, eroding the supernormal profits of large multinational firms that was achieved through various sources of economies of scale.
We also note the existence of Schumpeterian competition that emerges through innovation affect price and quantity. Accordingly, firms can become price competitive through cost savings and hence reduction in price and also increase output through faster production facilities.
For example, despite excessive supply of oil by incumbent firms to derive down prices and to create a price war against shale-oil producers, chasing them out of the market, advancement in fracking technology has enabled these smaller companies to stay put and to withstand fierce competition.

10. Application
We can also apply price mechanism to illustrate the future price of oil due to changes in determinants of demand and supply that shift the curves and hence the price, text, Ch. 12.
Examples include increase in demand due to global recovery; increased availability of substitute for oil including renewable energy and energy efficiency, sustainable development; increased production of shale in countries like Russia and Argentina; conflict in the middle east ; increased mergers and acquisitions amongst shale oil firms; etc.

11. Conclusion
You should discuss the structure of the oil industry before and after the entry by US shale producers. Focus on the cost structure by which small companies can take on some massive oil producing multinational firms.
Also, pay attention to the strategic moves by OPEC countries in response to the emergence of small companies in the market in terms of price and quantity.
To get a top mark, structure your essay well and just focus on answering the question.
In-text & end-text Referencing
Go through the check list before assignment submission.
Good luck.