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AP®︎/College Microeconomics
Oligopolies and monopolistic competition
What are the differences between monopolies and perfect competition? An oligopoly refers to a market with only a few sellers. Monopolistic competition refers to situations where there are many sellers, but the products are highly differentiated. There are several important nuances to explore between these types of markets. Created by Sal Khan.
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- Aren't name brand products (i.e. clothing, cars, etc) considered imperfectly competitive markets and even more highly differentiated markets (i.e. the car industry) considered monopolistically competitive? The difference between a ferrari and a porsche is much greater than the difference between a polo shirt from lacoste and a polo shirt from ralph lauren.(18 votes)
- I think my examples might clarify you predicament.
Pure/Perfect competition- Agriculture (many farmers, all growing the same thing)= Price Takers
Monopolistic- Clothing industries (all making shoes, but each shoe is different depending on the company)= Bc of their market power(some), they are NOT price takers.
Oligopoly- Gas industries (most gas stations will have about the same price per gallon)= A say in price but most will be about the same
Pure Monopoly - Local utilities (in the US, ComEd provides the nation's electricity -> ignore the government controlling aspect of ComEd and focus on dominance of 1 firm over the market)= Price Makers(46 votes)
- The difference between Monopoly and monopolistic competition(4 votes)
- Most simply, in a monopoly market their is only a single seller. In monopolistic competition, there are a few sellers selling slightly differentiated products.(13 votes)
- poly- means many and mono- means one so doesn't the word monopoly mean "one many"?(6 votes)
- The Greeks also used poly as a suffix to mean sell, or one who sells. So, as Sal said, it would mean mono "One" poly "Seller."
When used as a prefix, poly usually has the other meaning of "many."
Like Polyhedron or polygon.(13 votes)
- What about products that have high differentiation and few competitors (i.e. Those on the top left part)? Do they exist?(4 votes)
- I would say very rarely, but possible if you consider luxury items like million dollar sports cars and such. It's not that there are regulations to limit entry, but more that it's very hard to succusfully enter.(7 votes)
- When Sal drew the graph, he put low differentiation for monopolies. But what if there are two competitors? Then the differentiation should be very high, as both companies want to dominate the industry. So shouldn't a monopoly have extremely high differentiation, because the other companies don't exist?(3 votes)
- If there are two competitors, then differentiation can be very low. Think of things like Coke and Pepsi, which are so similar that most people can't tell the difference, although different enough to be legal. Think of Visa and MasterCard, which have almost exactly the same policies.
In fact, if you have two ice cream vendors on a 1 mile beach, competition will force them to have such low differentiation that they even position themselves at exactly the same place on that beach and have exactly the same flavors of ice cream.
So, since duopolies can have both low differentiation and high differentiation depending on the market, the differentiation for a monopoly actually becomes undefined.(4 votes)
- what would the solar industry be?(3 votes)
- Industries dealing with solar equipment, i think, would be categorized under perfect competition because even though there are many brands, there aren't many alternatives affecting people's demand other than it's prices.(2 votes)
- my textbook talks about something called monopsony. where does that fall?(1 vote)
- Monopoly is when there is only one seller of a good or service. Monopsony is when there is only one buyer. I am trying to think of an example for you, but in reality monopsony isnt something you will encounter very often. You would see monopsony when you are, for example, a big government project that needs to buy some weird and rare chemical element for a top secret project. Maybe there is no one else in the world that needs that product except for you. You are the only buyer.(5 votes)
- So, if I understand this correctly, the airline industry would be an oligopoly, right?(2 votes)
- I think my examples might clarify you predicament.
Pure/Perfect competition- Agriculture (many farmers, all growing the same thing)= Price Takers
Monopolistic- Clothing industries (all making shoes, but each shoe is different depending on the company)= Bc of their market power(some), they are NOT price takers.
Oligopoly- Gas industries (most gas stations will have about the same price per gallon)= A say in price but most will be about the same
Pure Monopoly - Local utilities (in the US, ComEd provides the nation's electricity -> ignore the government controlling aspect of ComEd and focus on dominance of 1 firm over the market)= Price Makers(2 votes)
- I would like to learn about Long run and short run.(1 vote)
- I think there is a lot of information on the Internet, but not here in particular. I can tell you, as far as I know, that the difference between long run and short run is the factors, which have to be included in both supply and demand curves.(2 votes)
- does monopoly and oligopoly have excess capacity? and how does it occur?(2 votes)
Video transcript
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 and 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 their terms for other
situations that are in between? And 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 there are. So this is the number
of competitors. And 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 was 0, then
there wouldn't even be a market to speak of. No one is doing 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 is 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 50 producers of
screws and all of those screws are completely identical. And so if one producers
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 other of
the many producers. So that would be a case right
over here, low differentiation. All the screws are the same and
there's a bunch of competitors. So that's about as perfect
as 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 then you
would be sitting right over here, pretty close in the
world of perfect competition. In the other spectrum, you
imagine your utilities. In most places in, especially
the US, but probably the world, there's only one utility. There's only one entity that's
managing the power lines. A lot of times,
because of that, it's actually run by the government. But in most of the US 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. And 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 are in between. So for example, if you
thought about your, let's say that the telephone
providers in your area-- there normally are 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. So 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 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 could think
of markets where there is a bunch of competitors. There's a bunch of
competitors, but they are somewhat differentiated. And I could think
of fine dining. So let's say-- so here,
there's a bunch of restaurants in any place that sells nice
food, that they really define themselves by the quality of
the food that they produce. So they're highly
differentiated. Each restaurant is unique. The chefs 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
name brand clothing. There they're very
differentiated, certain designers,
certain materials, all of those type of things. But there's a bunch of them. So 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. Or maybe I'll just say,
computers in general. Some people might want
to go for an Apple. That's what they've
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're saying, they're
using the same processor, the same memory chip. They're saying, using
all the same thing. So they're much
less differentiated. So this might be right
over here unbranded. And that tends to happen with
the personal computer industry. They're just like, well, they're
using the same Intel chip. They're using 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 this 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
could put other things around here, so I'll circle
this general area. We would call these oligopolies. And 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. And 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 kind of--
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
competitive, even if there's only a few providers. So oligopolies can kind
of, in their personality characteristics, they can
either look more like monopolies or they can look like kind of
very competitive industries. And these things up
here, where these are quite competitive
industries, but they are highly
differentiated-- to some degree, you can
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's
many, many people who could provide computers. But they have a brand. If someone wants
an Apple Computer, you have to go to Apple. It's almost-- it's a
self-evident statement. But it's highly
differentiated, highly branded. And so they have a
monopoly on their product but there are many, many,
many, other competitors who are out there that
won't let them just set price because they
can offer products that serve the same
purpose but they're differentiated in some way. And 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-- because the first word you here is monopolistic--
but this is more, at least in my mind, closer
to perfect competition than it is to a monopoly. Because this is a-- or at least
the way I view it in my mind, monopoly is 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 other not too
different similar products-- there are other products on
the market whose prices affect your price. Or there are other
alternatives, I should say, in the market that will
affect people's demand for your product. And the best giveaway between
a monopolistic competitor and a perfect
competition is that there is some differentiation
with the products over here. There is some maybe
branding here. There's maybe some
quality difference between the products.