Evaluation of oligopoly

Question 1

Merits

Answer 1

• dynamically efficient
• EOS (large pdtn)
• wider choice range for consumers

Question 2

Demerits

Answer 2

• Allocative inefficiency
• Productive inefficiency
• Wastage of resources from excessive ad

Question 3

Dynamic efficiency

Answer 3

• has incentive and ability to invest in large-scale R&D
• supernormal profits (LR)
• will engage in non-px competition
• fear of creative destruction

Question 4

EOS (large-scale pdtn)

Answer 4

• large share of industry’s total output
• COP will be substantially lower than other firms
• lower px and higher output
• consumers benefit

Question 5

Wider choices in pdt range for consumers

Answer 5

• product development
• increased pdt variety
• more choice for consumers, benefits them

Question 6

Allocative inefficiency

Answer 6

• P>MC
• at MR=MC, MC rising
• opp cost incurred
• not enuf of gd produced
• misallocation of resources
• society’s welfare not maximized
• deadweight loss (from loss of consumer and producer surplus)
• to improve: increase output to P=MC

Question 7

Productive inefficiency

Answer 7

• output not at min pt of AC curve
• at min pt – oligopoly’s AC is higher than min AC
• might result in X-inefficiency (firm produce at pt above LRAC curve)

Question 8

Wastage of resources frm excessive advertising

Answer 8

• further differentiate products
• increase revenue
• lower PED
• imaginary pdt differentiation raise costs
• scarce resources could have been used for more productive uses
• opp cost
• consumer welfare compromised