Oligopolies, duopolies, collusion, and cartels
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.
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- 5:36brings up Boeing, which made me think of defense contractors. How are weapons manufacturers (like Boeing, Lockheed-Martin, Northrop-Grumman, etc.) classified and regulated?(10 votes)
- The examples of weapons manufacturers you gave would be somewhere between oligopolistic and monopolistic competition. The start-up capital required is huge; the barriers to entry are high; yet there is differentiation among them (planes vs. tanks vs. missiles).
How are they regulated? Strict contractual law binds them to supply arms to one country or to an organization of countries. If it wasn't for the contractual law, then I bet some weapons manufacturers would gladly do business with "the enemy". So the regulations are severe. I hope I am right.
Anyone else know more?(23 votes)
- Not sure if I asked this previously, but can Samsung and Apple be considered a Duopoly in today's smart phone market?(9 votes)
- Hi. Since there are a couple of other major players (Huawei, Amazon, Microsoft come easily to mind), an oligopoly setting seems more appropriate here.(30 votes)
- Can you explain what is "The Cournot Game"?(8 votes)
- No, it's too advanced to be explained in a response. It is an application/approach of games theory in finding price-output equilibria under competitive markets. It could take a whole Khan video on its own to explain!(8 votes)
- So it seems like collusion between firms is always a bad thing. Is there an instance where collusion between firms in an industry could be considered socially desirable?(6 votes)
- In producing mutually acceptable Excellence Awards, Standards of Practice, Quality Standards and Compatibility Standards, or even a Code of Ethics and a Body of Knowledge for their profession. That way they can self-regulate so that they outcast companies (or employees) among them that threaten consumers trust towards their whole industry and reward companies (or employees) that advance their industry as a whole. Ofcourse this comes at a cost of rising barriers to entry, but in some cases the net effect is positive.(6 votes)
- What happens when firms in a cartel in an oligopoly betray the terms of the cartel?(1 vote)
- Usually a cartel is enforced through licensing laws. A famous example is in New York, there are a fixed number of medallions that license you to drive a cab. And one cab driver can only pick up so many passengers in a day. If you tried to drive an unlicensed cab, you'd be fined or even arrested.
Many professional organizations and licensing laws exist to restrict supply. The American Bar Association, for instance, restricts the supply of lawyers by adjusting how hard the Bar exam is. Hairdressers have to get expensive licenses to practice, and so forth. Many times you'll hear companies demand regulations, you might think, "why would they want more regulations on themselves?!" But they're often happy to take a loss if it puts smaller competitors out of business.(6 votes)
- What is the difference between collusion and cartels?(2 votes)
- There is little difference. A cartel is a group that colludes. Collusion is simply the act of conspiring to increase your economic benefit as well as the benefit of those with whom you collude. Sometimes collusion occurs without any communication. We call this tacit collusion. More vocal than tacit collusion, a cartel is a defined association that colludes.(3 votes)
- What think about the following suggestion? Although the government may prefer a perfect competition to a Monopoly for obvious reasons of engineering and economic efficiency. However, if the monopoly has huge economy of scale, it may be more profitable to retain it but impose tax - the tax imposition may not necessarily be discretionary.(2 votes)
- True. A good example might be rail-road monopolies. Although there is a lot of discussion about whether these markets should be dominated by a monopoly or by perfect competition, it could be more efficient for the government to have a monopolist for economic efficiency (economies of scale / investments).
And sometimes they impose restrictions on profitability (ie. the company needs to invest any profit over a certain amount, instead of taxes).. which might be better because it increases the consumer surplus to restore balance!(3 votes)
- If having almost perfect competition is most efficient why do people try to make monopolies or try to collude?(1 vote)
- The reason we can have perfect competition in some markets is because those markets are very easy for new producers to enter. If there are inefficiencies in the market, or if producers are raking in huge profits, then new firms join the market to contest these profits and opperate more efficiently. This is what keeps perfect competitors honest. If markets are hard to enter--if one firm has control of all of the resources needed to make a good, or if the equipment needed to produce something is outlandishly expensive, etc.--then there can't be perfect competition by definition, because new firms can't simply enter the market to keep the older firms honest. This sort of a situation (referred to in economic terms as "barriers to entry") is what allows monopolies and oligopolies to come into existence.
Furthermore, highly efficient markets mean low profit. The economic term "allocative efficiency" means setting the price at the cost of production. Monopolies and cartels can figure out ways to set prices higher than this. Contrary to what Alexander said, this price isn't "higher than consumers want to pay." Every point on the demand curve represents a price that some consumers are willing to pay. No one is "forced" to buy at this price; rather, they have the option to buy at this price or to not buy at all, which is always the case when there is one price in a market, whether the market is perfectly competitive or not.
In sum, firms can make more profit when they're not forced to be efficient. Perfectly competitive markets are easy to enter, and new firms enter whenever existing firms are too profitable, in order to take a slice of the profits for themselves. Monopolistic and oligopolistic markets are nearly impossible to enter, so firms in these markets are not forced to be efficient, and they can therefore make profits in the long run.(4 votes)
- At7:56, Sal said that the governments get involved to prevent cartels and monopolies to push parties towards perfect competition - how do they do that?(1 vote)
- Many governments have outlawed collusion between companies, making cartels impossible. Governments will also often break up monopolist corporations into several smaller companies.(4 votes)
- Hotdogs and buns definitely have some back deal. Hotdogs come in 10 and buns come in 8. you'd need five bags of the 8 pack buns and four of the 10 pack hotdogs you will break even.(2 votes)
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.