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Economics U$A: 21st Century Edition

Oligopolies (Microeconomics)

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Competition with General Motors eventually rendered Ford’s single-option Model-T obsolete. In 1959, a reporter for the Knoxville News-Sentinel discovered a price-fixing scandal between three big-name electric companies in each of their closed bids to the Tennessee Valley Authority. In the late 1970s, President Jimmy Carter ordered Professor Alfred Kahn to deregulate the airline industry, which had been a federally protected oligarchy. These are all examples of oligopolies and the forces that influence them.

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Unit Overview

Purpose:

To show that many markets are dominated by a small number of firms, and how these try to avoid price competition.

Objectives:

  1. Most markets in the U.S. fall somewhere in between perfect competition and monopolies. Either there are only a few large firms in an industry (oligopoly), or there are many firms which sell differentiated products (monopolistic competition). Producers in these industries realize that price competition will only reduce profits for every firm in the industry so they often try to gain market power through nonprice competition (e.g., product differentiation, advertising, and aggressive marketing).
  2. When there are few firms in an industry, they may attempt to fix prices. This results in higher prices and less production of the good than would occur under perfect competition, and it adversely affects economic efficiency. Unregulated price fixing is illegal.
  3. Large firms may be very helpful for stimulating long-term growth through R&D, by capturing economies of scale, by superior management, and through their efforts to grow larger.
  4. In some industries (airlines, railroads, trucking) the government has regulated prices either to help the industry grow or to control the pricing behavior of the industry. Generally, the affected industries favor regulation because it saves them from having to compete on the basis of price, but they often become very inefficient and have unnecessarily high costs. Also, regulated companies can often “capture” and co-opt regulators.

Meet the Series Experts

Alfred Kahn

Chairman of the Civil Aeronautics Board during the period when it ended its regulation of the airline industry, paving the way for low-cost airlines from People Express to Southwest Airlines. Generally considered a liberal Democrat, his strong advocacy of deregulation stemmed from his economist’s understanding of marginal-cost theory. Earlier, he taught economics at Cornell University, where he served as Chairman of the Department of Economics, a member of the Cornell Board of Trustees, and Dean of the College of Arts and Sciences. Dr. Kahn received his B.A. from New York University and Ph.D. in Economics from Yale University.

Leo Ribufo

Distinguished Professor of History at George Washington University and Visiting Professor at Fudan University in China. He also held the Organization of American Historians/American Studies Association residency in Japan and was a specialist abroad for the United States Information Agency in Nigeria and the Republic of Korea. Before moving to George Washington University, he taught at Yale University and Bucknell University. Dr. Ribufo received his B.A. from Rutgers University and Ph.D. in American Studies at Yale University.

What's your economics IQ?

Take the Economics USA: Oligopolies Quiz.

Quiz Addendum:

2. Answer explanation:
Oligopolies can sell differentiated products (automobiles are an example), and though the amount of advertising each conducts may differ, consumers are not as likely to be aware of that as of the number of sellers involved. Monopolistic competition involves many sellers, oligopoly few.

3. Answer explanation:
The second option is characteristic of oligopolies, but not the definition. The first and fourth options are completely incorrect.

Glossary

  • concentration ratio
    The percentage of a market taken up by a certain number of firms; used to determine competitiveness of the market.
  • monopolistic competition
    A market structure in which there are many sellers of somewhat-differentiated products, entry is easy, and there is no collusion among sellers. Retailing seems to have many of the characteristics of monopolistic competition.
  • nonprice competition
    Market contest between firms involving ANYTHING but price, e.g., quality, convenience, style.
  • oligopoly
    A market structure (such as those for autos and steel) in which there are only a few sellers of products that can be either identical or differentiated.
  • price collusion
    A secret agreement between rival firms for the purpose of receiving large profits or cornering the market through price fixing or supply reduction.
  • price leader
    In an oligopolistic industry, a firm that sets a price that other firms are willing to follow.
  • regulatory capture
    A theory associated with George Stigler, a Nobel laureate economist, whereby an agency—formed to set parameters on industry movements for the sake of public interest—eventually acts in ways that benefit the very industry they set out to control.

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Economics U$A: 21st Century Edition

Credits

Produced by the Educational Film Center. 2012.
  • Closed Captioning
  • ISBN: 1-57680-895-5