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Oligopolies, duopolies, collusion, and cartels

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When does an oligopoly act more like a perfectly competitive firm, and when does it act more like a monopolist? Find out in this video. Created by Sal Khan.

Video transcript

What I want to do in this video is get a better understanding of oligopolies. And we'll be talking about it, oligopolies. We'll be talking about it more in future videos. And as we've already talked about, this part of oligopolies, the oligo-- and I know I'm completely mispronouncing it-- comes from the Greek word for few. And the poly comes from the Greek word for sellers. And I don't want to confuse anyone because the prefix poly, like in terms of polynomial or polymath, when it's a prefix poly often means or it does mean many. But in this context, this comes from the Greek. And once again, I know I'm mispronouncing it, poll-e-in, I think, or polein, which actually comes from seller. So this means few sellers. And what's interesting about oligopolies are that they can sometimes act much more like monopolies if they coordinate. Or 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-- so let's say there are these few competitors. And let's say they coordinate with each other. They say, hey, look, we're going to be-- because there's a few of, enough of them, that they can coordinate-- they say, hey, look. Why don't we restrict quantity so that we can raise price? And then we're essentially 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 were saying that they are colluding. And if they have a formal agreement to collude, we call these players right over here, we call them a cartel. And they're approaching, their behavior, is much closer to a monopoly. They're essentially trying, at least, to act together like a monopoly. And at the most famous of all of the cartels is OPEC. You sometimes hear about the drug cartel. I'm not an expert there. I guess, that's implying that there's some form of coordination there, some form of price setting, some form of quantity restriction. But the most famous, and maybe the one with the largest impact, is OPEC. And OPEC stands for Organization of Petroleum Exporting Countries. And it's a group of 12 countries that collectively control 79%-- this is as of 2012-- that collectively control 79% of the world's oil reserves. So oil reserves are the actual oil that's in the ground or the oil that we know is in the ground. Obviously there's other oil that we don't know where it is, but it's in the ground. But this is 79% of the oil that we're aware of that is in the ground. And they control about 44% of the production, of oil production, of current oil production. So in a given month, 44% of all the oil in the world is coming from these OPEC countries. And they're predominately countries in the Middle East, but they now include countries that are outside of the Middle East. And they have a formal agreement where they try to restrict output so that they can get the price to whatever price they want it to be. So they are at least attempting to act somewhat like a monopoly. They don't control all of the oil reserves. They don't control all of the oil production. But by coordinating it they can act like a bigger player than they are individually. But what we'll see in future videos is that even though it is good, collectively, for them to do this-- for them to coordinate it this way and it can't be illegal, because they're all countries coordinating with each other. So no one can say, hey, what you're doing is illegal because they are essentially acting outside of any one country's laws. But what we'll see in the future is that there's a huge incentive for any one of these 12 countries to break the agreement secretly. To say, OK, I'm going to restrict quantity just like all the rest of you guys but then secretly keep producing more and getting that higher price that is being achieved because everyone else is restricted. So it's actually very hard, even if you have formal agreement, to maintain discipline within a cartel. Now that was an example of trying to coordinate, trying to be collude, trying to become more like a monopoly. There are many, many cases of oligopolies, at least as far as I know, that are fiercely, fiercely competitive. Probably the most famous of them are Coke and Pepsi. So this would, I guess, fall under the sugar water market. They both take water, and they place a lot of sugar in that water, and then they spend millions, or maybe even billions in some circumstances, on marketing to make you convinced that somehow that sugar in that water will make you cool, or trendy, or you'll have more friends, or you'll be better looking, or whatever else. But they are fiercely competitive. These-- they could coordinate and say, hey, let's raise the price of 12 ounces of sugar water to $1 or $5, and if you do it, I'll do it as well. But they don't. They compete fiercely on price. They compete fiercely on marketing. And that's actually where they really, really, compete. And this is actually a special case of an oligopoly where you only have two players, two major players. And this you would call a duopoly. Other examples of duopoly, you could imagine Boeing and Airbus. If you fly on a commercial aircraft, especially a new commercial aircraft, and especially a large commercial aircraft, it is going to be either a Boeing aircraft or an Airbus aircraft. Boeing is the US manufacturer. Airbus is the European manufacturer. And 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 quite fiercely on price. They're both wining and dining countries and airlines that are looking to buy new planes, or whatever. Other examples of oligopolies that are more competitive, especially more competitive than something like OPEC-- you have something like the airlines. Just going with that airplane theme, you have the airlines. In fact, I gave airlines as an example of an industry that seems to behave in a kind of perfectly competitive way. A seat, an economy class seat on most airlines is fairly undifferentiated. There's a lot of very good price information in the airline industry, better than in almost every industry. But you do have not too many competitors. They're all aware of each other. They all know each other's prices. To some degree, they're looking at each other's prices to figure out what their own prices should be. It's not like they have a million competitors out there and they can't keep track of everyone. So airlines, they're not a duopoly-- so let me make a line here. Airlines are not a duopoly but they are definitely an example of an oligopoly where the market is approaching perfect competition. And there's others. You could have something like the credit card networks. You have Visa, MasterCard, and American Express. And really these first two are the dominant ones. But once again, very few players and they are not coordinating, or at least we don't know they're coordinating. And so they are competing. But there have been cases of companies, especially in oligopolies, where all of a sudden someone does find out that there's some type of a back room deal where they say, hey, why don't we coordinate and not raise our production? Or we keep our prices high and both of us kind of hold that discipline? And that's where the governments have to get involved, and regulate, and make sure that between parties that there really isn't this type of thing. Because from most governments' point of view, they want to push the parties out there as close to perfect competition as possible. And we've seen, the closer you get to perfect competition, the further away you get from being a monopoly, the more efficient production you have. The larger total surplus you have, and the more of that total surplus goes to the consumers.