Oligopoly and the Economy
Oligopoly is found in many industries and in all advanced economies. It
often occurs in industries with significant economies of scale. In such
industries, there is simply not enough room for a large number of firms all
operating at or near their minimum efficient scales.
Two questions are important for assessing the extent to which oligopoly
is beneficial for society. First, to what extent is competition between the
oligopolists keeping prices below their monopolistic level? Second, how
much do oligopolists contribute to economic growth by encouraging
innovative activity in the very long run?
Profits Under Oligopoly
Some firms in some oligopolistic industries succeed in coming close to
joint profit maximization in the short run. In other oligopolistic
industries, firms compete so intensely among themselves that they come
close to achieving competitive prices and outputs. To the extent that price
remains above competitive levels (and output below), oligopoly will be
less efficient than perfect competition, with implied welfare losses for
society as a whole.
In the long run, those profits that do survive competitive behaviour
among existing firms will tend to attract entry. Profits will persist only