Oligopolies and monopolistic competition Thinking about different markets that are in-between monopolies and perfect competition
Oligopolies and monopolistic competition
- We've spoken a lot about monopolies and we've spoken a lot about perfect competition.
- And we kind of view them as polar opposites. Over here you have exactly one player, here you have many players.
- In a monopoly you get to set the price of the quantity, here you have to be a price taker.
- In a monopoly, there's huge barriers to entry, in perfect competition there's no barriers to entry.
- What I want to think about in this video is are there other situations, or especially are there terms for other situations, that are in between?
- To think about that, I'm going to draw a spectrum. I'm going to do a two dimensional spectrum.
- I could probably think of more variables where there's nuance between these terms, but these are the two big ones.
- So in one dimension, I'm going to think about the number of competitors that there are.
- This is a number of competitors.
- Competitors. Number of competitors.
- Now, obviously a monopoly is one competitor; perfect competition you've got a bunch of competitors.
- So I'll put one right over here and a bunch of competitors.
- If this were zero there wouldn't even be a market to speak of; no one is participating there.
- In this axis, in the vertical axis, I want to think about how differentiated
- the competitors in the market are. How different are their products or their brands?
- Differentiation in the market.
- And this was low differentiation and this is high differentiation.
- So let's think of a bunch of industries and think about where they sit here
- and then I'll introduce you to two new words other than just a monopoly or perfect competition.
- So, let's just say that we live in a world where there's fifty producers of screws
- and all those screws are completely identical.
- And so, if one producer charges even a penny more no one's going to want to go to them
- because they can get the exact same thing from one of the many other producers.
- That would be a case right over here - low differentiation, all the screws are the same and there are a bunch of competitors.
- So, that's about as perfect as a perfect competition can get in the real world.
- So, bunch of identical screw manufacturers.
- I'm not sure if the actual screw market has a bunch of competitors,
- but let's just assume if it did you would be sitting right over here,
- pretty close in the world of perfect competition.
- In the other spectrum you imagine you are a utilities,
- and most places in the U.S. and probably the world, there is only one utility,
- one entity that's managing the power lines.
- A lot of times it's actually run by the government,
- but in most of the U.S. it's a regulated private company.
- And so here you have one player, and you could debate whether
- it's low differentiation or so high differentiation that it's the only player.
- But, let's just stick it right over there, low differentiation.
- This right over here might be a utility.
- That's about as close to a monopoly, or that actually is a monopoly - they are the only player there.
- Mono, mono comes from one. Poly comes from seller. One seller that would be a utility.
- Now there are things that would be in-between.
- So, for example, if you thought about your, say the telephone providers in your area.
- There are more than a few people who can provide phone service, especially with the age of internet telephony,
- now the cable companies are starting to provide phone service and the telephone companies
- are starting to provide internet and cable service.
- So, we could think of that market.
- Let's put this market right over here.
- So, the number of competitors is low, so it's going to be here, and they are somewhat differentiated,
- they might give you a different cable box, or they might offer you slightly
- different levels of bandwidth or whatever else.
- So, they're somewhat differentiated right over here.
- So, I'll call that the cable internet telephone providers right over there.
- Then you can think of markets where there's a bunch of competitors, but they are somewhat differentiated.
- I can think of fine dining.
- So, here there's a bunch of restaurants in any place that sells, you know, nice food
- and they really define themselves by the quality of the food that they produce.
- So, they're highly differentiated. Each restaurant is unique, the chef's have specialties and all the rest.
- But, there's a bunch of them.
- So, right over here I will put fine dining.
- You could also imagine, you know, name brand clothing.
- They're very differentiated, certain designers, certain materials and all those type of things, but there's a bunch of them.
- Name brand clothing. It's not quite perfect competition;
- it's very competitive, there's a bunch of players there, but they're not selling the same product.
- They are very, very differentiated.
- To some degree, you almost feel like even though there's all this competition,
- they have a monopoly on their own product.
- Another one could be, you could imagine something like, high-end laptops, or high-end computers,
- or nice computers. Maybe I'll just say computers in general.
- Some people might want to go for an Apple, that's what they have associated with, and some people might want to go for a Sony.
- So, maybe I'll put branded computers up here. But, then you could also have something like the
- unbranded PC market, and that might be something closer to here where you might have these random manufacturers,
- you don't even care, some manufacturer from overseas, you don't even care
- but they are saying that they're using the same processor, the same memory chip,
- they're using all the same things. So, they're much less differentiated.
- So, this might be over here, unbranded, and that tends to happen with the personal computer industry.
- It's usually like, well, they're using the same chip, the same memory, they're all running Windows,
- whatever else. There's not a lot of difference between them, so those actually start getting closer to perfect competition.
- So, the whole reason that I've introduced these ideas to you is that there are names for these things
- that aren't quite perfect competition, because they're highly differentiated,
- and there are names for these things that aren't quite monopolies because they have a few providers.
- These right over here, so, we can put other things around here, so I'll circle this general area.
- We would call these oligopolies. Oli, this comes from this part right over here,
- and I'm not an expert in Greek, but this comes from few.
- And, obviously, the poly, once again, just as with monopolies, comes from sellers.
- So, this means few sellers. In oligopolies, and we're going to study this in much more detail,
- they're not quite monopolies, they can't set the price and the quantity, and they can,
- depending on the oligopoly, depending on the market, they might start acting more like a monopoly.
- The players could coordinate with each other, to their mutual benefit,
- or they might become fiercely competitve. Even if there's only a few providers.
- So, oligopolies can kind of, in their personality characteristics,
- can either look more like monopolies, or they can look like very competitive industries.
- And these things up here, where these are quite competitive industries,
- they are highly differentiated. To some degree you could say that,
- for example, in branded computers Apple has a monopoly on selling Apple computers.
- It doesn't have a monopoly on computers. Obviously there are many, many people that can
- provide computers, but they have a brand; if someone wants an Apple computer,
- you have to go to Apple. It's a self-evident statement. But, they're highly differentiated,
- highly branded, so they have a monopoly on their product,
- but there are many, many other competitors who are out there who won't let them just set price
- because they sell products that serve the same purpose,
- but they're differentiated in some way.
- So, these players up over here, we would call these, or these markets,
- these are monopolistic competition.
- And when you first hear that it sounds more because the first word you hear in monopolistic.
- But, this is more, at least in my mind, closer to perfect competition
- than it is to a monopoly. This is, at least the way I view it in my mind,
- monopoly is completely, completely uncompetitive.
- While this is still highly competitive; it's still not quite as highly competitive as perfect competition,
- but it's close. You have a monopoly in just your product,
- but there are are not too similar products on the market who's prices affect your price.
- There are other alternatives, I should say, in the market that will affect people's demand
- for your product. And the best give away between a monopolistic competitor
- and perfect competition is that there is some differentiation between the products
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