Free «Market Definition And Market Power: An Article Review» Essay Paper
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The question of a theoretical explanation of the processes and changes taking place in the economy is becoming increasingly important in light of the development of the global market economy. The successful economical advance depends on the degree of development of individual markets and industries, as well as their competitive and technological levels. The market power of players present in different fields is one of the key factors determining the state of the industrial market.
Market power allows the players operate in a particular market and have an impact on other participants of market members and, therefore, determine the future direction of development of the market. The boundaries of such an effect determine the degree of market power that the player has in the market. A greater extent of market power gives the players great opportunities to influence the market, as well as set out the level of dependency in the market.
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As a result, the industrial economics essays aim at the discussion of the market power existing in a specialised market. A Financial Times article named ‘Even the Saudis cannot defy market forces forever’ and written by Nick Butler will help see the author’s point of view to the matter concerned and the way he uses theoretical knowledge to inform the reader about the issue. The central focus of the article is the influence of Saudi Arabia on the oil market, the way it affects the overall market, as well as the competitive environment and factors that form the price and pressure in the market.
Butler (2016) presented an interesting article named ‘Even the Saudis cannot defy market forces’. The writing piece discusses important issues that the oil market has. It is worth noting that the article shows a well-organised structure of writing. In particular, it is related to the components of the article as Butler has managed to allocate the most influential parties that are present in the market, which are Saudi Arabia, Russia, Iran, Algeria, Venezuela and Nigeria. Moreover, the article includes the information about the structure of the market and external forces that influence the market.
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Market power assists the players in accumulating resources for additional investments in production, which contributes to the development of innovation and fosters economic growth, boosts the introduction of progressive development and technological progress, and, ultimately, leads to an increase in the welfare of the entire population (Goodwin et al. 2013). The players’ strong stand strengthens the country’s position in the international arena, as well as increases its credibility in the eyes of the world community (Belleflamme & Peitz 2015).
Thus, the author has used the classification of the market structure when writing the article. In particular, the work discusses the market from the standpoint of the economic purpose of the objects of the market relations, which is the market of goods, and by geographic location informing the reader about the global market by describing the presence of existing players in it. At the same time, Butler (2016) highlighted the degree of restriction of the competition, noticing that oil market is an oligopolistic one, operating in the oil extraction industry.
According to Mankiw (2008), an oligopolistic market has the following features. Firstly, it includes a small number of participants, which means that the volume of market supply is in the hands of a few large businesses. Secondly, the sector offers differentiated products. Thirdly, the market is characterized by the existence of significant barriers to market entry. Finally, only members with large stakes in the total sales volume can affect the price of the goods (Clo 2013).
The scholar also described the factors that have an influence on the oil market. More specifically, Butler (2016) pointed that political and geopolitical aspects bring about the local changes in the market dynamics. The issue is related to the effect on the dynamics of the military intervention in oil-production countries. Afterwards, Butler noticed that the oil producers should involve Iran in the business as one of the large oil importers. As for economic factors, the deficit of consumption affects the volume of production and the price of petroleum in the world, which is affected by the economic prerequisites (Looney 2012). Hence, the impediment of economic growth leads to a decrease in the level of industrialization and, subsequently, reduces the extent of consumption. For example, Butler (2016) argues that “Chinese demand in December fell year on year.”
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Another important aspect of the article is the emphasis on the balance of supply and demand in the oil market. Mankiw and Taylor (2007) argued that supply and demand mainly depend on the market price. Therefore, there is a vicious circle at the level of generality where cause and effect are reversed. Supply and demand form the market equilibrium price. At the same time, the price determines the relation between the supply and demand. Consequently, the cost acts both the component of demand and supply. Supply and demand are important tools for identifying social significance and the value of work carried out by the costs of production of certain goods. The labour theory of value supports this fact (Rubin 2008).
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According to Butler (2016), “market forces are certainly winners from the shift of power.” Market power is the ability to establish a price that exceeds the costs, in particular, additional or marginal cost (McKenzie & Lee 2008). It is mainly related to the cost of production of one additional unit of output. Market power ensures the transformation of costs into higher profits. The acquisition and preservation of market power are significant elements of the player’s strategy of maximising the value (Faulkner, Teerikangas & Joseph 2012). It is probably one of the main reasons why Butler has decided to highlight on the Saudi Arabia issue since it is the country that holds the market power in the global oil market. The author describes the state as the one that holds the monopoly over the oil production.
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A monopoly represents an extreme degree of market power in which the player can influence the price of goods by changing the amount of the proposed product (Baumol & Blinder 2015). The monopoly has such power, in case the demand curve for the offered product has a negative slope, that it can set the price of the commodities above the marginal cost of production. Consequently, it is necessary to determine the amount by which the price of profit maximisation exceeds the marginal cost (Png 2013). Such a move helps in measuring the market power of the player.
Butler (2016) highlights the limitations of the market power. According to the author, Saudi Arabia “must start to recognise the limits of its power.” It can be explained by the fact that the market power is dependent on the characteristics of the demand, the value of production costs, and the achieved level of technology development (Tremblay & Tremblay 2012). The value of the market power is not static but is constantly changing depending on the modifications of the marketplace situation that can include the following components. Firstly, there are sources that arise from the side of demand. They are the elasticity of market demand, the availability of substitute products and the value of cross-elasticity of demand for them, as well as the growth and temporary fluctuations in demand. The resources also include the method of implementation of consumer purchases and the features of the production market like consumer durables and others (McEachern 2012). Secondly, these are the sources that come from the side of supply. These are technology features that predetermine the achievement of economies of scale for large volumes of release, legal barriers to the entry of competitors in the industry, as well as the location and ownership of prevailing raw materials or resources (Parkin, Powell & Matthews 2007). Additionally, the resources contain the possession of specific factors of production that are favourable only for particular players with a limited offer on the market, and barriers created by the participants. It can include the policies of price limiting, dumping, cartel, etc. (Carson, Thomas & Hecht 2015). Moreover, these are the existence of irreversible penetration costs to the market, such as advertising, sales promotion, equipment, treatment facilities, quality management system, etc. Finally, the resources also include random reasons allowing some players in the industry grow faster than the competition and become leaders in the defined market (Wilson & Gilligan 2013).
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To sum up, it is possible to notice that the article that has been presented by Butler in the Financial Times recently is written based on the theoretical knowledge of the economy. It fits within the basic background of macroeconomic principles. The author emphasises on the changes of the market power among the oil producers of the world. At the same time, Butler supports and backs his arguments with the comprehensive knowledge allowing the reader to identify the source as credible that can become the essence of the current trend of the global oil industry and its active and possible players.