Monopolies vs. perfect competition | Microeconomics | Khan Academy

In this video, we're going to dig a little bit into the idea of what it means to be a monopoly. To help us appreciate that, let's think about the spectrum on which firms can be. This is going to be my spectrum right over here.

Now, at the left end, we can imagine this idealized perfect competition. Perfect competition, and we've talked about that in other videos, but just as a review, this is where you have many firms. This is where they are selling an undifferentiated product or service—undifferentiated, undifferentiated product. The firms over here, they've talked about in other videos, they need to be price takers.

Why do they need to be price takers? Well, whatever the market price is, since no one cares which of these firms, which of these many firms, they get the product from, none of those firms can really set their own price. If they were to go above the market price, well, then no one will buy from them. So they will just be price takers. Other things that we assume about perfect competition is that all of the actors in the market, both the buyers, the many buyers, and the many sellers, they all know what the transactions are going on for. They know who's selling to whom for what amount.

Now, the other extreme—this is where we have the monopoly. Monopoly here, instead of many firms selling or many firms producing, you have exactly one firm producing. Instead of an undifferentiated product, well, it's differentiated because it's the only firm. Instead of no barriers to entry/exit, here we're at the exact opposite. So you could say insurmountable, insurmountable—I'll just abbreviate it—barriers, especially to enter.

And instead of being a price taker, you are a price setter. Price setter—you're the only player, you're the only actor who is selling anything, so you can decide what price to sell it at. Now, perfect competition, as I talked about, it's a bit of a theoretical idea. It's hard to say any market that is absolutely perfect, but we can imagine markets that are on this spectrum, some closer to perfect competition, some closer to a monopoly.

Things that I can imagine that are closer to perfect competition might be, let's say, agriculture or a certain type of agriculture. Let's say you're buying pistachios. Most people are indifferent as to where their pistachios come from, although some people might beg to differ that certain types of pistachios are better than others. But for the most part, that'd be closer to perfect competition. There will be just a price in the market for pistachios.

If someone wants to grow pistachios—I'm not familiar with what it takes to grow pistachios, and I apologize to any offense to any pistachio growers out there—but maybe they can just get enough land, and there are very close to low barriers to entry, and they can start producing pistachios. As I mentioned, many would perceive it as undifferentiated, and there might be many firms in, say, the pistachio market. I actually don't know if that's the case, but let's just assume if that were the case, it would be closer to perfect competition.

Now, a monopoly—you can imagine things like things that take a lot of infrastructure in order to do that service. So I can imagine things like, over here close to monopoly or at monopoly, you can imagine things like utilities providers—utilities where it's hard for multiple people to run power lines to the various houses. You can imagine things like this—telecom providers might be close.

Although in most geographies, you have more than one telecom provider, although in some parts of the world, you're getting pretty close to one. Because, once again, there's very, very, very high barriers to entry. Either one of those, you got to launch satellites and put up cable under the ground and dig up roads and whatever. So you could get closer and closer to this notion of maybe there's one firm.

If you're in a situation like telecom in a lot of the places where you have only a handful of firms, that's known as an oligopoly. But let's just think about the extreme when you're in a monopoly situation. So the next few videos, we're going to dive a little bit deeper into what it means to be a monopoly and what is the rational quantity for a profit-maximizing monopolistic firm to actually produce and what would be their economic profit.