Okay. So when we are thinking about

how different firms can interact,

let's look at the case

where there is just handful

of really large firms.

That's what economists call an Oligopoly.

Remember in perfect competition

there will huge number of small firms

making identical products.

Those firms have to sell at the market price

and basically only have to decide

how many units to produce.

For monopolies,

a monopolist competition

firms have to decide

both their quantity of output

and what price to sell that output for.

They are facing

downward-sloping demand curves.

So higher price means lower sales

and vice versa.

Oligopoly adds a twist to this game.

When an Oligopolist is trying to decide

how much to produce

it has to think not only

about how consumers will respond

but also how its competitors will respond.

Say that there are only two firms

producing left-handed baseball bats.

Left swings and third strike.

There is an overall demand

for left-hand baseball bats.

The more baseball bats

the two firms produce in total

the lower the price.

What both firms would love to do

is commit to producing

only a few bats each.

That will keep the price really high

but they will each make high profits.

But with high prices

each firm has an incentive

to produce a few more bats.

Left swing is hoping

that third strike will keep its output low

which means the price is high.

So that left swing can produce more bats

at high profit.

But third strike

is hoping exactly the same thing.

So neither of them wants

to be the ones stuck restricting output

so that their competitor

can run up the score.

So they both start expanding output

driving down prices and profit

even though that outcome is worse

for them both.

There is a whole field of economics

called the game theory

that models how these interactions work.

In terms of price and quantity

where do Oligopolies end up

relative to perfect competition.

Well it depends on

whether the firms trust each other.

If they can all agree

then their output will be lower

than perfect competition.

And their prices and profits

will be higher.

But there is always an incentive

for some joker

to produce more at that high price

which causes the others to produce more

in which case the agreement collapses

and they end up pretty close

to the perfectly competitive

price and quantity.

An example of this is the OPEC oil cartel

which is based on countries not companies.

Saudi Arabia and Venezuela and Nigeria

would all love to keep

oil production low and prices high.

But at several points

that agreement has unraveled

as one country gives into the temptation

to produce more oil

to sell at those high prices.

When that happens they all produce more.

And the price of oil will fall

by 20 or more dollars per barrel.

So Oligopolies are

where there are a few large firms

in a market.

And they not only have

to trade off price and quantity

but they also have to take the actions

of their competitors into account.