b) Discuss the view that an oligopoly is always efficient in the market (15)

Whether oligopolies are desirable depends on the type of industry and the type of oligopoly in mention.

Consumers tend to benefit more from competitive oligopoly because such structures have rigid pricing and do not increase prices. Prices are rigid as explained from the kinked demand curve, and even if they move, tend to be sticky downwards. On the other hand, collusive oligopolies tend to practice price leadership and cartel pricing which will result in higher prices and less consumer welfare. Variety is also considerably less than the competitive oligopoly which is characterised by high level of product differentiation, since they do not use price competition.

A good example would be coke vs pepsi cola, prices are rigid and producers differentiate products to attract consumers.

Oligopoly in general though, charge higher prices than the PC and MPC, hence consumers get less welfare, although it is arguable that they differentiate way more.

Producers benefit due to supernormal profits. This is due to high barrier to entry that allows them to continue making such profits in the long run.

Societal efficiency is low in oligopoly in general. They are not allocative efficient because they do not produce at MC=AR, since they are price takers, they producer at MC=MR instead to maximise profits.

oligopoly supernormal profits

oligopoly supernormal profits

Producers are also productively inefficient because they do not produce at the minimum AC where MC=AC. Due to high BTE, they produce to the left of AC and costs are higher as compared to PC which is productively efficient.

Oligopoly derives huge dynamic efficiency though. This is because they have incentive and ability to do so. They have abnormal profit, and they also have to constantly engage in product differentiation as a means of competition, so there is a high level of innovation over time. Such as apple and samsung developing new phones and tablets.

Essentially, competitive oligopoly tend to be desirable in the form of higher dynamic efficiency. These tend to be good in industries which require high level of innovation such as Pharmaceutical and automobile. So whether oligopoly is good depends in essence on the type of industry in question.


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