Oligopolies, duopolies, collusion, and cartels | Microeconomics | Khan Academy

Summary

This video explores oligopolies, markets dominated by a few sellers. It explains how oligopolies can either collude to act like monopolies or compete fiercely among themselves. Examples include OPEC, which coordinates oil production, and Coca-Cola and Pepsi, which engage in fierce competition in the soda industry. The video also highlights other oligopolies like airlines and credit card networks, emphasizing how government regulation helps prevent anti-competitive behavior and encourages a more efficient market. Ultimately, oligopolies can range from coordinated price-setting to competitive markets with few players.

Takeaways

• 😀 Oligopolies are markets with only a few sellers, derived from the Greek words for 'few' (oligo) and 'sellers' (poly).
• 😀 Oligopolies can behave like monopolies if the sellers coordinate to restrict quantity and raise prices, which is known as collusion.
• 😀 Collusion, when formalized, is called a cartel. A famous example is OPEC, which controls a significant portion of global oil reserves and production.
• 😀 Cartels, like OPEC, can attempt to act like monopolies, but maintaining coordination is difficult due to the temptation for individual companies to cheat and break the agreement for personal gain.
• 😀 Despite the potential for collusion, many oligopolies are fiercely competitive, with companies competing on price, marketing, and product differentiation.
• 😀 A duopoly is a specific type of oligopoly where only two companies dominate the market. Coca-Cola and Pepsi in the soda industry are an example.
• 😀 In a duopoly, the two companies may fiercely compete on various aspects, such as price and marketing, rather than cooperating.
• 😀 Boeing and Airbus exemplify a duopoly in the aircraft industry, where both companies compete for contracts, often with government support.
• 😀 Airlines represent a more competitive oligopoly, with few players, but prices and services are highly competitive, mimicking perfect competition.
• 😀 Credit card networks like Visa, MasterCard, and American Express are examples of oligopolies, where few players dominate but compete without known collusion.
• 😀 Governments regulate oligopolies to prevent illegal coordination, ensuring competition remains and preventing monopolistic behavior that harms consumers.

Q & A

What is the meaning of the term 'oligopoly'?

The term 'oligopoly' comes from two Greek words: 'oligo' meaning 'few' and 'polein' meaning 'sellers'. It refers to a market structure dominated by a few sellers.

Why is the term 'poly' in 'oligopoly' confusing?

'Poly' often refers to 'many' in words like 'polynomial' or 'polymath', but in the context of 'oligopoly', it refers to 'sellers', meaning 'few sellers'.

What is the behavior of oligopolies when they coordinate?

When oligopolies coordinate, they may restrict quantity to raise prices, essentially maximizing collective economic profit. This behavior is similar to monopolistic practices.

What is collusion in the context of oligopolies?

Collusion occurs when firms in an oligopoly coordinate their actions, such as setting prices or restricting production. This is illegal in many countries.

What is a cartel, and can you provide an example?

A cartel is a formal agreement among firms in an oligopoly to collude and behave like a monopoly. A famous example is OPEC, the Organization of Petroleum Exporting Countries, which coordinates oil production and pricing.

What challenges do cartels face in maintaining cooperation?

Even within formal agreements, individual countries or firms may have an incentive to secretly break the agreement, producing more than agreed upon to take advantage of higher prices. This makes maintaining discipline difficult.

What is a duopoly, and can you provide an example?

A duopoly is a market dominated by two firms. Examples include Coke and Pepsi in the soft drink market, and Boeing and Airbus in the commercial aircraft industry.

How do Coke and Pepsi compete in their oligopolistic market?

Coke and Pepsi fiercely compete on price and marketing, often spending billions to promote their products and create brand loyalty, rather than coordinating to raise prices.

What are some other examples of oligopolies outside of Coke and Pepsi?

Other examples of oligopolies include the airline industry, with a few dominant carriers, and credit card networks, such as Visa, MasterCard, and American Express.

How do governments regulate oligopolies and prevent harmful behavior?

Governments often regulate oligopolies to prevent collusion and ensure competition. They aim to encourage market behavior closer to perfect competition, which is more efficient and benefits consumers by increasing total surplus.