One according to consumers demand. Therefore, oligopoly is

One of the economic impacts caused by oligopoly is
inefficiency. There are several reasons due to which oligopoly is said to be
inefficient. An essential factor that contributes to this is that oligopoly
market charges high prices to consumers. Charging high prices in oligopoly
often results from collusion among firms. This is because, collusion causes
price to be maintained high which is harmful to consumers. Collusion is where
the collective verdict to collude among firms affects the whole market
significantly. Through collusion, firms benefit from avoiding priced
competition and wanting to agree on higher prices and protected sale volumes. Aim
of such collusion is to  increase
individual member’s profit by reducing competition. As all the competing firms
have colluded, they make an agreement which is generally illegal, with each
other where they can increase the price to a higher level. Due to this,
oligopolies may earn a supernormal profit, however the consumers are
experiencing a huge exploitation. This is because , they are spending more to
purchase products that should be available at lower price. It is also evident
that reducing the price of goods in oligopoly may increase its sales and market
share. Hence, most probably colluded firms will cheat on the agreement they
made as cartels are usually unstable.

 

Source:

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Other than that, output restriction in oligopoly also
results in high selling cost. This is because,  oligopoly faces a downward sloping demand
curve. As a result, marginal revenue at each level of sales is lower than
product price (P > MR) and as the profit-maximising firm produces output at
where marginal revenue equals to marginal cost (MR = MC), marginal cost will
eventually be lower than price of goods (P > MC). Due to this, output is
restricted and prices are increased above the level of cost.

Moreover, restriction on entry of new
firms causes additional restriction as in some oligopoly markets, producers end
up creating a market that leads to inflation of price. Although this is
advantageous for producer but this phenomena is nothing less than a nightmare
for consumers.

Not only that, high promotional cost
also contributes to high selling cost in oligopoly. This is because, producers
in oligopoly market gets involved in many advertising tasks to increase their
sales. Hence, the resources are wasted in the form of high selling cost which
doesn’t increase the satisfaction of customers.

As oligopoly is producing output at
where price is above minimum average cost (P > min ATC) and at where price
is more than marginal cost (P > MC), it is not both productively efficient
and allocatively efficient respectively. This shows that oligopoly neither
produces in the cheapest way nor produces the right amount of goods according
to consumers demand. Therefore, oligopoly is neither productively efficient nor
allocatively efficient.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MARKET FAILURE AND  EXTERNALITIES

 

Another
economic impact caused by oligopoly is market failure and externalities. In
economics, market failure is a phenomena where a market allocates goods and
services inefficiently. This usually happens when price mechanism fails due to
an externality or market power. Externality is effect of an economic activity
which affects a bystander, it can either be beneficial or harmful. A positive
externality is a benefit that we receive from consuming or producing a good or
service. For example, water consumption of consumers who prefer drinking
bottled water has increased as bottled water is largely available in all
grocers and is also portable. On the other hand, negative externality is vice
versa of positive externality. For example, huge backdrop of bottled water is
the waste. This is because when water is finished, the bottle still remains.
This is known as external cost as it brings negative impacts to society. The
consumer will not have to pay social cost as he only pays for private cost
which is for bottled water. In such a case, society is forced to deal with the
waste. Negative externality usually occurs when social cost exceeds private
cost. Consequently, externality does not matter to consumers as they ignore
social cost. Hence, market failure occurs.

 

Moreover,
market power also contributes to market failure. This is because, market power
has the capacity to influence market price of goods as it hold control over
demand and supply. Firms who are price makers have power to influence price
while other price taking firms has to accept the given price. For example, in
oligopoly ‘cartel’, a formal agreement among existing firms is done. The aim is
to increase individual member’s profit by reducing competition. Due to this,
new firms wanting to enter market will face barriers to entry. Consequently, it
will create market failure as market should be equilibrium where demand should
equal supply.

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