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Explain the Dominant Firm Model and apply it to the OPEC cartel to explain why they...

Explain the Dominant Firm Model and apply it to the OPEC cartel to explain why they have been successful in maintaining world oil prices above competitive levels. Use a diagram to illustrate your answer.

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Answer #1

Under the dominant firm model the large firm acts as a dominant firm and sets the price of the product and the fringe firms act as a price taker and behave as a price competitors.

The OPEC cartel behaved as a dominant firm in the market for oil. We can look at this using the diagram.

In the diagram TD is the total demand for oil and S(non-OPEC) is the competitive supply curve. The demand for OPEC is the difference between the total demand and the supply by the non-OPEC firms..

The total demand and supply of non- OPEC firm are inelastic. Therefore the demand for OPEC firms will also be inelastic OPEC’s profit maximizing quantity is given by Qopec and charges price = P*. If the OPEC cartel didn’t exist then price will be at PC where the MC opec intersects its demand.

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