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European Oil Company Behavior in 1996

1. Oligopolistic theory predicts collusion and price stability under certain conditions. What evidence is there that this has broken down and why has it happened?

An oligopoly is defined in terms of the number of firms participating in an industry and the degree of interdependence that exists between those firms (Miller, 1995, p. 297). A small number of major firms, together with a high level of interdependence between these firms, characterize an oligopoly. With respect to the issue addressed in this question, the conditions than permit an oligopoly to develop also are important. The facilitating conditions for an oligopoly are economies of scale, barriers to entry, product differentiation and advertising, and oligopoly by merger. For an oligopoly to develop, substantial economies of scale must be possible, barriers to entry must be high, and product differentiation must be feasible. Merger is not always essential for the creation of an oligopoly; however, the feasibility of horizontal merger with an industry can facilitate the development of an oligopolistic industry.

Three important developments occurred within the British petroleum market that caused the conditions for oligopoly to breakdown or at least to become severely stressed. These same factors also were at work in the wider European market, although their development was more rapid in the narrower British market ("Big is beautiful," 1996, p. 1B). First, the demand for petroleum at the retail level declined (Weston & Barrie, 1996, p. 2). This decline in demand occurred for a number of reasons, of which improved fuel economy in motor vehicles likely was the most important. The decline in retail demand for petroleum caused a refinery over capacity situation in the industry ("Big is beautiful," 1996, p. 1B; Weston & Barrie, 1996, p. 2). Economies of scale demanded that the refineries operate at or near to capacity regardless of demand from an oil company's retail...

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European Oil Company Behavior in 1996. (1969, December 31). In LotsofEssays.com. Retrieved 06:07, March 19, 2024, from https://www.lotsofessays.com/viewpaper/1694744.html