One of the economic impacts caused by oligopoly isinefficiency.
There are several reasons due to which oligopoly is said to beinefficient. An essential factor that contributes to this is that oligopolymarket charges high prices to consumers. Charging high prices in oligopolyoften results from collusion among firms. This is because, collusion causesprice to be maintained high which is harmful to consumers (UK Essays, 2013). Collusionis where the collective verdict to collude among firms affects the whole marketsignificantly (‘Collusion’, 2017). Through collusion, firms benefit fromavoiding priced competition and wanting to agree on higher prices and protectedsale volumes (Lawaspect, 2017). The aim of such collusion is to increase individual member’s profit byreducing competition (Deviga and Karunagaran, 2013).
As all the competing firmshave colluded, they make an agreement which is generally illegal, with eachother where they can increase the price to a higher level (UK Essays, 2013).Due to this, oligopolies may earn a supernormal profit, however the consumersare experiencing a huge exploitation. This is because , they are spending moreto purchase products that should be available at lower price.
It is alsoevident that reducing the price of goods in oligopoly may increase its salesand market share. Hence, most probably colluded firms will cheat on theagreement they made as cartels are usually unstable (UK Essays, 2013). Source:Other than that, output restriction in oligopoly alsoresults in high selling cost. This is because, oligopoly faces a downward sloping demandcurve.
As a result, marginal revenue at each level of sales is lower thanproduct price (P > MR) and as the profit-maximising firm produces output atwhere marginal revenue equals to marginal cost (MR = MC), marginal cost willeventually be lower than price of goods (P > MC). Due to this, output isrestricted and prices are increased above the level of cost (Pagoso, Dinio andVillasis, 1997). Moreover, restriction on entry of newfirms causes additional restriction as in some oligopoly markets, producers endup creating a market that leads to inflation of price (Chegg Tutors, 2003).Although this is advantageous for producer but this phenomena is nothing lessthan a nightmare for consumers. Not only that, high promotional costalso contributes to high selling cost in oligopoly. This is because, producersin oligopoly market gets involved in many advertising tasks to increase theirsales.
Hence, the resources are wasted in the form of high selling cost whichdoesn’t increase the satisfaction of customers (Economic Discussion, no date). As oligopoly is producing output atwhere price is above minimum average cost (P > min ATC) and at where priceis more than marginal cost (P > MC), it is not both productively efficientand allocatively efficient respectively. This shows that oligopoly neitherproduces in the cheapest way nor produces the right amount of goods accordingto consumers demand (Welker’s Wikinomics, no date). Therefore, oligopoly isneither productively efficient nor allocatively efficient.