Oligopolies, duopolies, collusion, and cartels Thinking about when oligopolies behave more like monopolies or perfect competitors
Oligopolies, duopolies, collusion, and cartels
- What I want to do in this video is to get a better understanding about oligopoly.
- We will be talking about it…oligopolies…
- We will be talking about it more in future videos.
- As we already talk about this part of oligopolies:
- the oligo, and I know I completely miss pronounce it, comes from the Greek word for few and the poly part comes from the Creek word for sellers.
- I don’t want confuse anyone because the prefix poly,
- like in terms polynomial or polymath, the prefix poly often means, poly does mean many,
- but in this context it comes from the Greek and once again I miss pronouncing it, polian or polie which actually comes from sellers that means few sellers.
- What is interesting about oligopolies are that they can sometimes act much more like monopolies if they coordinate, or if they can still, even if there are few sellers, even two sellers,
- they can compete fiercely and look much closer to perfect competition.
- So, an example is, if they, let’s say these few competitors, let’s say they coordinate with each other.
- They say, hey look, (because they are few enough of them that they can coordinate), why don’t we restrict quantity so that we can raise price and chances are maximizing our collective economic profit.
- So they are agreeing to coordinate, and this is illegal within the context of most countries, most companies are not allowed to do this in most countries.
- But when this is going on (this kind of coordination between the players in an oligopoly), this is called collusion or we say they are colluding, and if they have a formal agreement to collude, we call these players a cartel.
- They are approaching their behavior is much closer to a monopoly.
- Then, they are trying at least act together like a monopoly, and the most famous of all of the cartels is OPEC, you sometime hear about the drug cartel,
- but I’m not an expert there, I guess, that’s implying there are some forms of coordination, some forms of price setting, some forms of quantity restriction.
- But the most famous and maybe the one with the largest impact is OPEC. OPEC stands for Organization of Petroleum Exporting Countries, and is a group of 12 countries that collectively control 79% of the world oil reserves.
- So the oil reserves are the actual oil in the ground, or that the oil we know is in the ground.
- There are other oil but we don’t know where it is, but it is in the ground. But this is the 79% of the oil that we are aware of in the ground, and they control about 44% of the current oil production.
- So given a month, 44% of all the oil in the world is coming from these OPEC countries.
- And they are predominately countries in the Middle East, but they now include countries that are outside the Middle East.
- And they have a formal agreement where they try to restrict output so they can get the price to whatever price they want it to be.
- So they are, at least, attempting to act somewhat like monopoly.
- They don’t control all the oil reserves, they don’t control all the oil production, but by coordination they can act like a bigger player than they are individually.
- What we see in future videos is that even it is good collectively for them to do this, for them to coordinate in this way, but it can be illegal because they are all countries coordinating with each other.
- So no one can say, what you are doing is illegal.
- Because are essentially acting outside any one country’s laws.
- But what we will see in the future is that there’s a huge incentive for any one of these countries to break the agreement secretly.
- They say:” OK, I am going to restrict the quantity just like all the rest of you guys, but secretly keep producing more and getting that higher price that is being achieved because everyone else is restricted.
- So actually, it is very hard to, even if there is a formal agreement to maintain discipline within a cartel.
- Now, that was an example of kind of trying to coordinate, trying to collude, trying to become more like a monopoly.
- There are many cases of oligopolies, as far as I know, are fiercely competitive.
- Probably the most famous of them are Cokc and Pepsi.
- And this are, I guess, both under the sugar water market.
- They both take water, and they place a lot of sugar in that water, and they spend millions or maybe billions under certain circumstances on marketing to make you convinced that somehow that sugar water will make you cool or trendy, or you will have more friends, you’ll be better looking or whatever else.
- But they are fiercely competitive.
- They could coordinate and say:” hey, let’s raise the price of twelve ounces of sugar water to a dollar or five dollars if you will do I will do it as well.
- But they don’t, they compete fiercely on price and marketing.
- And this is actually a special case of oligopoly where you only have two major players, this is what we called duopoly.
- Other examples of duopoly, you could imagine Boeing and Airbus.
- If you fly on a commercial aircraft, especially a new aircraft, especially a large aircraft, it is going to be either Boeing aircraft or an Airbus aircraft.
- Boeing is the US manufacturer, Airbus is the European manufacturer.
- Although Boeing is always complaining that Airbus is getting support from the European Union, and Airbus is always complaining that Boeing is getting support from the US, they do compete fiercely on price; they are both dinning and winning countries and airlines that are looking to buy new planes.
- Other examples of oligopolies are more competitive, especially more competitive than OPEC, you have something like the airline.
- I gave airline as an industry seems to behave in a kind of perfectly competitive way.
- An economic seat on most airlines is fiercely undifferentiated; there is a lot of good price information in the airline share better than in almost every industry.
- And but you do have not too many competitors, they are all aware of each other, they all know each other’s prices to some degree they are looking at each other’s prices to figure out what their own prices should be.
- It’s not like a million competitors out there and can’t keep track of everyone.
- So airlines they are not duopoly (so let me make a line here), but they are definitely an example of oligopoly that where the market is approaching perfect competition.
- There are others you could have something like the credit card, networks.
- You have VISA, Master Card and American Express.
- These first two are the dominant ones, once again very few players and they are not coordinating or at least as far we don’t know they are coordinating, and so they are competing.
- But there have been cases of companies especially in oligopolies, someone does find out some backroom deal where they say:
- Hey, why don’t we coordinate and not raise production, we both keep our prices high, both of us hold kind of discipline.
- And that’s where the governments have to get involved regularly and make sure that between parties there really isn’t this type of thing.
- Because from most government’s point of view, they want to push the party out there as close perfect competition as possible.
- We’ve seen the closer you get to the perfect competition, the further away you get from the monopoly, the more efficient production you have, the larger total surplus you have and more of that total surplus goes to the consumers.
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