The Bad of Oligopoly Like much of life, oligopoly has both bad and good. The bads are that oligopoly: (1) tends to be inefficient in the allocation of resources and (2) promotes the concentration, and thus inequality, of income and wealth. Inefficiency: First and foremost, oligopoly does NOT efficiently allocate resources. Like any firm with market control, an oligopoly charges a higher price and produces less output than the efficiency benchmark of perfect competition. In fact, oligopoly tends to be the worst efficiency offender in the real world, because perfect competition does not exist, monopolistic competition inefficiency is minor, and monopoly inefficiency has the potential for being so bad that it is inevitably subject to corrective government regulation. Concentration: Another bad is that oligopoly tends to increase the concentration of wealth and income. This is not necessarily bad, but it can be self-reinforcing and inhibit pursuit of the microeconomic goal of equity. While the concentration of wealth is not bad unto itself, such wealth can then be used (or abused) to exert influence over the economy, the political system, and society, which might not be beneficial for society as a whole. The Good of Oligopoly With the bad comes a little good. The two most noted goods from oligopoly are (1) by developing product innovations and (2) taking advantage of economies of scale. Innovations: Of the four market structures, oligopoly is the one most likely to develop the innovations that advance the level of technology, expand production capabilities, promote economic growth, and lead to higher living standards. Oligopoly has both the motive and the opportunity to pursue innovation. Motive comes from interdependent competition and opportunity arises from access to abundant resources. Economies of Scale: Oligopoly firms are also able to take advantage of economies of scale that reduce production costs and prices. As large firms, they can mass produce at low average cost. Many modern goods--including cars, computers, aircraft, and assorted household products--would be significantly more expensive if produced by a large number of small firms rather than a small number of large firms.
Posted on: Sat, 20 Sep 2014 22:02:42 +0000
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