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.