Question

Do oligopolies produce an efficient level of output?

Answer 1

By manufacturing goods at a minimum average overall cost, pure competition achieves competitive efficiency. Also, they gain allocative efficiency as they generate price before their marginal cost. However, since oligopolies produce only until marginal cost = marginal revenue, pure competition lacks both the competitive and allocative quality.

Since oligopolies can effectively thwart competition, they limit production to maximize income, generating only up to the marginal cost = marginal revenue. Thus, oligopolies show the same inefficiencies as a monopoly. Because the marginal cost curve intersects the marginal revenue curve before it intersects the average overall cost curve, oligopolies never achieve an efficient production efficiency scale because they never operate at their minimum average overall cost. Likewise, the marginal cost curve never intersects the consumer demand curve; thus, oligopolies generate less output than the customer wants, thereby losing allocative efficiency for oligopolies.

Consumers continue to gain most from stable oligopoly because the prices of these systems are static and do not grow. As illustrated from the kinked demand curve, prices are static, and even if they rise, appear to be sticky downward. Collusive oligopolies, on the other hand, tend to practice price leadership and cartel pricing, leading to higher prices and less consumer welfare. Variety is therefore considerably smaller than the dynamic oligopoly marked by a high degree of product differentiation, because they do not use competition in prices.

Oligopoly however derives enormous dynamic efficiency. They have incentives and the ability to do so. They have an extraordinary income, and they still have to participate actively in product differentiation as a means of competition, so over time there is a high degree of innovation. Developing new phones and tablets, such as apple and samsung.

In essence, competitive oligopoly tends to be desirable in the form of greater dynamic effectiveness. In industries that require high levels of innovation such as pharmaceutical and automotive, these tend to be good. And the nature of whether oligopoly is nice depends on the form of industry in question.