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Explain how the long-run equiibrium under oligopoly differs from that of perfect...

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yaga49 | (Level 1) Valedictorian

Posted June 6, 2013 at 12:47 PM via web

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Explain how the long-run equiibrium under oligopoly differs from that of perfect competition?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted June 6, 2013 at 1:13 PM (Answer #1)

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The major difference in the long run equilibrium between a market that is in perfect competition and one that is in monopoly is that there will be a lower equilibrium quantity at a higher equilibrium price in an oligopoly.  This is because of a lack of competition.

As we know, an oligopoly is a market structure in which there are only a very few companies.  There are few companies because there are high barriers to entry.  In perfect competition, there are very low barriers to entry.  This means that when firms start to make economic profit, others will enter the market.  In an oligopoly, this is not really possible.

What this means is that the industry supply will be lower than it “should” be in an oligopoly.  Simple supply and demand analysis shows us that an industry with lower supply will have (all other things being equal) a lower equilibrium quantity and a higher equilibrium price than an industry with higher supply would.  This means that economic profit can be made in an oligopoly where it cannot be in perfect competition.  It also means that there will be allocative inefficiency in an oligopoly, but not in perfect competition.

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