“Purely competitive firms sell their product at the same price. This is also true in some monopolistic markets with standardized products. Therefore, these oligopolies are actually highly competitive.” Evaluate critically

Question

What will be an ideal response?

Answer 1

These oligopolies are rivals, but they are not competitive in the economic sense that leads them to produce at the most efficient price and output level. Production takes place at an output level where MR = MC, but price will be above MR so the firm will earn economic profits, and allocative efficiency will not be achieved. Furthermore, the lack of competition may mean that the firm is not forced to produce at the point of minimum average cost, so productive efficiency is not achieved.
Purely competitive industries, on the other hand, achieve both productive and allocative efficiency, because competition brings price and output to the level where production is at minimum average cost and economic profits disappear.
It might be pointed out that monopolies also sell their product at a single price, but that does not make a monopoly highly competitive. [text: E p. 298; MI p. 298]

51. What are three qualifications to the view that allocative and productive efficiency are not realized in oligopoly?

Oligopoly is thought to be evocatively and productively inefficient because price will exceed marginal cost and output will be less than the minimum average-cost level of output. One qualification to this view is that foreign competition has made many monopolistic industries much more competitive when viewed on a global scale. A second qualification is that monopolistic firms may keep prices lower in the short run to deter entry of new firms. A third qualification is that monopolistic industries tend to foster more rapid product development and improvement in production than if the industry were purely competitive. The monopolists have more funds for research and development and the barriers to entry can protect the firm’s investment. Thus oligopoly may have some redeeming virtues that offset its apparent inefficiencies.