Cambridge International as and a level Economics Ebook

177
Chapter 7: The price system and the microeconomy 

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Source:
Adapted from 
The New York Times
, 16 August 2013.
f
Earlier airline mergers in the USA, it is claimed, have 
resulted in reduced capacity and higher prices. These are 
not the benefits that were promised. For example, aft er 
the United-Continental merger, the combined airline had a 
79% share of services between Chicago and Houston. Three 
months aft er the merger, fares were 57% higher than three 
years earlier. This compares with an increase of only 16% 
for the same period over the rest of United’s network.
1
What are typical reasons for business mergers?
2
To what extent do these reasons apply to mergers 
in the global pharmaceutical industry and in the 
airline industry?
3
What 
benefi ts might consumers get from larger 
companies in the two industries?
open to any countries that are substantial net exporters of 
crude petroleum. As a cartel, OPEC is widely criticised. 
Members produce about one-third of the world’s oil yet 
own around 80% of known crude oil reserves as well as half 
of the reserves of natural gas. It clearly has much power in 
the market to determine not only current but, signifi cantly, 
future prices. With projected growth in global demand, 
it is easy to see why there are calls for OPEC to increase 
production, otherwise stocks in consumer countries will be 
depleted to a dangerously low level.
Th
e only thing that will weaken OPEC’s economic power 
is if new suppliers outside of the cartel appear or consumers 
take action that will reduce consumption. Technology may 
provide alternatives to oil in the future. Th
e cartel will 
weaken if there is disagreement over the target price or the 
production quotas allocated to each member country.
OPEC denies that it is acting as a single monopoly, 
cutting output in order to charge high prices to consumers 
and points out that Western governments make more 
money from the tax on oil than the producing countries 
receive in revenues from selling the oil.
At the retailing end of the industry, the supply is in the 
hands of an oligopoly of oil companies who deny that they 
are charging too much, insisting that their profi t margin 
is low because of fi erce competition. Total profi ts are only 
high because of the large turnover.
Some analysts predict that there will be further 
horizontal integration between oil companies that are 
already vertically integrated. Th
e oil industry will continue 
to be dominated by a few big players mainly because of the 
high fi xed cost and risks associated with exploration and 
drilling. If their controversial attempts to fi nd oil in areas 
like the Arctic and Antarctic are successful, then OPEC’s 
power could diminish.
Th
e long-term survival of a cartel depends upon the 
high barriers to entry. However, there are threats to a cartel, 
such as:
■
The possibility of a price war, whereby one firm breaks rank 
to capture a bigger market share.
■
If some members have higher costs than others, resulting in 
fewer profits due to the agreed fixed price.
■
If there is no dominant member that has the power to 
control others.
■
Legal obstacles such as in the EU and USA where cartels are 
illegal since they restrict competition and do not act in the 
best interests of consumers.