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.
