Competition is of three types, namely, monopoly, monopolistic competition, and perfect competition. There is another type of competition called oligopoly, which would fall between monopolistic competition and monopoly. The automobile industry happens to fall under the category of an oligopoly as there are a small number of firms that control the market and a large number of buyers. The topic is ‘Why is the Automobile Industry Considered an Oligopoly?’
Automobile Industry Considered an Oligopoly
The US automobile industry is considered to be an oligopoly as three major companies run the industry. The names of the companies are General Motor (GM), Chrysler, and Ford. This is evident from the prices that are prevalent in the market. It can also be seen from the development and introduction of new cars into the American market. Since the 1950s, there is sufficient evidence to suggest that the firms colluded, with the introduction of the small car. This article shall show how these three firms have made the industry oligopolistic.
The main idea behind an oligopolistic market is that a few companies or firms rule over the whole market, determining the price after collusion. Such a type of competition has allowed all the firms in the market to not just survive but also thrive and profit. The limited players in the market facilitate each other to operate successfully.
There is scope for a tremendous amount of competition in a market where a few sellers are selling a homogeneous or differentiated product. A few features of an oligopolistic market are the following:
- There are an extremely limited number of sellers
- These sellers either sell a homogenous product or a differentiated product
- Firms are incapable of entering and exiting the industry at will
- Firms that function in an oligopoly have to invest a great deal of money
- It is a constant struggle for the firms
- There is a very high level of price rigidity
The American automobile industry has helped shape the American economy and has had a huge impact on the cultural aspect of the nation. The oligopoly that it has evolved into has a huge part to play in this. These automobile makers used to be one of the most profitable companies that used to exist. These automobile giants constantly evolve and try to adapt to the general consumers’ demands. Business practice and production and distribution have drastically changed over the years, but they have supported the oligopolistic market system that is prevalent in the industry.
There is a clear indication that General Motors has a trend of being the determinants of price in the oligopoly. This can be inferred from the pricing decisions taken between 1965 and 1971. Chrysler would announce a price increase first, and then General Motors would follow by increasing their price lesser than the amount Chrysler would. This move led to Chrysler decreasing their price ever so slightly to match that of General Motors. Ford was also a price follower in this setup, following the likes of General Motors. After general motors, Ford and Chrysler shared a considerable advantage to form that oligopoly that exists to date. At the onset of the industry, there was no hard evidence to support the existence of a monopoly in the industry, but there was a strong barrier for the entry of other firms into the market. The three big companies made it reasonably tricky for other companies to create and sustain profits in the industry.
We must now understand how these three players in the market choose the prices. There is an apparent difference between how the prices are chosen in a market with perfect competition and such an oligopolistic market. In a perfect competition scenario, the competitors can increase their profits by creating the quantity where the marginal costs of creating a unit are equal to the market price, which is the same as the marginal revenue. This yields to the fact that the market is efficient and competitive solely due to the market participant charging the price where economic profit is zero. Competitiveness is avoided in this market as the companies collude together and set the prices jointly. The firms who are called oligopolists work together as a monopolist when it comes to decisions related to prices. They work towards maximizing the joint profit rather than focusing on their profits. This pricing decision results in the collusive price being a lot higher than the marginal costs at this quantity, and so maximizing the profit of the one company is the general maximized profit in the perfectly competitive market.
Influence on the Surpluses and Welfare
In cases like these where the oligopolists function essentially as one monopolist, there is neglect regarding welfare and a surplus of consumers. There is also a consistent increase in the number of producers because the price in the collusive oligopoly acts like a mark-up on the price-quantity equation of equalizing marginal costs with marginal revenues.
The market has become an economy because of the history that is there in the automobile industry. When cars were still a luxury to be owned, these three automakers were much more efficient than the competition and reaped the benefits because of that. In this process of reaping the benefits, they created this atmosphere of oligopoly, which began to bar other firms from entering and competing. A quote by Alfred Sloan of General Motors sums up the mentality that the oligopolists were in; “a car for every purse and purpose”. With this, they built a highly competitive oligopoly along with the two other competitors in the market.
Conclusion
To summarize the situation, the American automobile market is a complex one with an oligopolistic nature. The pricing strategy has been dominated by the three automobile giants who rule the industry, and they have a firm foothold in the industry. They have been able to manipulate the competition and have strategized how to make collective profits. It has become challenging for other firms to gain a foothold or a market share as it is challenging for new firms to enter an industry with such a strong oligopolistic nature. Moving ahead, there is little to suggest that the trend shall change. The only other players in the industry are those which sell luxury cars. However, they shall never be able to receive the sort of profits that these three giants have received merely because they have a tiny customer base. It is upon the government to ensure that this oligopoly does not go out of hand and stays under the control of the market to some extent, at least.
Frequently Asked Questions
- What is an oligopoly?
The main idea behind an oligopolistic market is that a few companies or firms rule over the whole market, determining the price after collusion. Such a type of competition has allowed all the firms in the market to not just survive but also thrive and profit. The limited players in the market facilitate each other to operate successfully.
- What are the three companies which are a part of the oligopoly in the automobile industry in America?
The three companies are General Motors, Ford, and Chrysler.
- Why is it not possible for other companies to gain a substantial market share in the automobile industry?
Ever since cars were a luxury to own, these three companies have made good business decisions and have taken over the market. They, to date, have no strong competitors for this very reason.
