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Monopolies vs. perfect competition

Learn about the key differences between the two extremes of competition: monopolies and perfect competition.

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Video transcript

- [Instructor] In this video, we're going to dig a little bit into the idea of what it means to be a monopoly, and so to help us appreciate that, let's think about the spectrum on which firms can be. So this is going to be my spectrum right over here. Now at the left end, we can imagine this idealized perfect competition, perfect competition, and we've talked about that in the other videos, but just as a review, this is where you have many firms. This is where they are selling an undifferentiated product or service, undifferentiated, undifferentiated product. The firms over here, well, they have no barriers to entry or exit, so no barriers to entry or exit. These firms that we've talked about in other videos, they need to be price takers. Why do they need to be price takers? Well, whatever the market price is, since no one cares which of these firms, which of these many firms they get the product from, none of those firms can really set their own price. If they were to go above the market price, well then no one will buy from them, and so they will just be price, price takers, and other things that we assume about perfect competition is that all of the actors in the market, both the buyers, the many buyers and the many sellers, they all know what the transactions are going on for. They know who's selling to whom for what amount. Now the other extreme, this is where we have the monopoly, monopoly. Here, instead of many firms selling or many firms producing, you have exactly one firm producing. Instead of an undifferentiated product, well, it's differentiated because it's the only firm. Instead of no barriers to entry or exit, here we have the exact opposite, so you could say insurmountable, insurmountable, mountable, I'll just abbreviate it, barriers, especially to enter, and instead of being a price taker, you are a price setter, price setter. You're the only player. You're the only actor who is selling anything, So you can decide what price to sell it at. Now, perfect competition as I talked about, it's a bit of a theoretical idea. It's hard to say any market that is absolutely perfect, but we can imagine markets that are on this spectrum, some closer to perfect competition, some closer to a monopoly. Things that I can imagine that are closer to perfect competition might be, let's say, agriculture or a certain type of agriculture. Let's say you are buying pistachios, and you might be, most people are indifferent as to where their pistachios come from, although some people might beg to differ that certain types of pistachios are better than others, but for the most part, that'd be closer to perfect competition. There will be just a price in the market for pistachios. If someone wants to grow pistachios, I'm not familiar with what it takes to grow pistachios, and I apologize to any offense to any pistachio growers out there, but maybe they can just get enough land, and there's very close to low barriers to entry, and they can start producing pistachios. As I mentioned, many would perceive it as undifferentiated, and there might be many firms in, say, the pistachio market. I actually don't know if that's the case, but let's just assume if that were the case it would be closer to a perfect competition. Now a monopoly, you can imagine things like things that take a lot of infrastructure in order to do that service. So I can imagine things like, over here, close to monopoly or at monopoly. You can imagine things like utilities providers, utilities, where it's hard for multiple people to run power lines to the various houses. You can imagine things like this. Telecom, telecom providers might be close, although in most geographies, you have more than one telecom providers, although in some parts of the world, you're getting pretty close to one because, once again, there's very, very, very high barriers to entry in either one of those. You gotta launch satellites and put cable under the ground and dig up roads and whatever until you get closer and closer to this notion of maybe there's one firm. If you're in a situation like telecom in a lot of the places where you have only a handful of firms, that's known as an oligopoly, but let's just think about the extreme, when you're in a monopoly situation, and so the next few videos, we're gonna dive a little bit deeper into what it means to be a monopoly, and what is the rational quantity for a profit-maximizing monopolistic firm to actually produce, and what would be their economic profit?