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Current time:0:00Total duration:8:26

Oligopolies, duopolies, collusion, and cartels

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PRD‑3 (EU)
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PRD‑3.C (LO)
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PRD‑3.C.1 (EK)
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PRD‑3.C.2 (EK)

Video transcript

what I want to do in this video is get a better understanding of oligopolies and we'll be talking about it I'll they got pulleys we'll be talking about it more in future videos and as we've already talked about this part of oligopoly is the oligo and I know I'm completely mispronouncing it comes from the Greek word for few and the Pali part comes from the Greek word for sellers and I don't want to confuse anyone because the prefix poly the prefix poly like in terms of polynomial or polymath when it's a prefix poly often means poly doesn't mean many but in this context this comes from the Greek and once again I know I'm mispronouncing it poly in I think or Pauline 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 if 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 they are getting into they are agreeing to coordinate and when and this is illegal within the context of most countries most most companies are not allowed to do this in most countries but when when this is going on this kind of coordination between the players and an oligopoly this is called collusion this is called collusion or we're saying that they are colluding and if they have a formal agreement to collude we call these players right over here we call them we call them a cartel we call them a cartel and they're approaching their behavior is much more is much closer to a monopoly than they're essentially trying at least to act together like a monopoly and 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's some form of price-setting some form of quantity restriction but the most famous and maybe the one with the largest impact is OPEC is OPEC and OPEC stands for Organization of Petroleum Exporting Countries and it's a group of 12 countries it's a group of 12 countries that collectively control 79 percent this is as of 2012 that collectively controls 79 percent of the world's oil reserves oil reserves so oil reserves are the actual oil that's in the ground or that 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 percent of the oil that we're aware of that is in the ground and they control about 44 percent of the production of oil production of current oil production so in a given month 44 percent of all the oil in the world is coming from these OPEC countries and there are predominantly 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 they are at least attempting attempting to act somewhat like a monopoly they don't control all 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 in 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're they're 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 to break the agreement secretly to say okay I'm going to restrict quantity just like all the rest of you guys but then secretly keep producing more on getting that higher price that is that is being achieved because everyone else is being is restricted so it's actually very hard even if you have a formal agreement to maintain to maintain discipline within a cartel now these that was an exam Belov kind of trying to coordinate trying to be collude trying to become more like a monopoly there are many many cases of oligopolies that at least as far as I know are fiercely fiercely competitive probably the most famous of them are Coke and Pepsi coke Coke and Pepsi so this would I guess fall under the 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 what that sugar in that water will will make you cool or trendy or or you'll have more friends or you'll be better-looking or whatever else but they are fiercely competitive these you know they could coordinate and say hey let's raise the price of it you know twelve ounces of sugar water to a dollar or five dollars 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 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 do ah Polly other examples of duopoly you can imagine Boeing 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 u.s. manufacturer Airbus is the European manufacturer and although Boeing is always complaining that Airbus is having 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 is going with that airplane theme you have the airlines in fact I gave I gave Airlines as an example of an industry that it seems to behave in a kind of a perfectly competitive way the a seat on 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 and 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 that'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 a oligopoly that where the market is approaching is approaching perfect competition and there's others you could you could have something like the credit card networks you have Visa MasterCard MasterCard and American Express and really these these two these first two are the dominant ones but once again very few players and they are not coordinating or at least as you know as far we don't know that they're coordinating and and so they are 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 backroom deal where they say hey why don't we coordinate and not raise not not raise our production or we keep our prices high and both of us kind of hold that discipline and that's whether we're where the government's have to get involved and regulate and make sure and make sure that between parties there really isn't that there really isn't this type of thing because from most government's point of view they want to push 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