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Oligopolies and monopolistic competition

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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.

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.