“Why is the auto industry considered an oligopoly?” this is a question many ask who are interested in the auto industry. An auto is usually a complex and very expensive vehicle that are controlled by one company. The reason for this limited market is because of the high cost of manufacturing the vehicle. Since there are only a limited number of companies that can produce automobiles, they have developed rules and structures through which they are able to control the supply of automobiles to the public at affordable prices.
Why is the automobile industry considered to be considered a pure monopoly?
A pure monopoly is a situation where the price of a product or service is set by a single competitor instead of being competitively regulated by a regulated market. Why is this important to know? Most consumers believe that price competition is good because it forces providers to lower their prices to ensure that they receive a return on investment. The problem with this belief is that it is based on the assumption that there is a free market where providers are forced to compete with each other.
In order to understand: why the auto industry is considered a pureopoly, it is necessary to examine the reasons that monopoly prices occur. The first reason that this occurs is because there are not enough competitors in the industry. It is nearly impossible for two companies to start a competing business without first establishing an obvious technological monopoly. For instance, it is nearly impossible for two companies to start a car repair shop that specializes in only one type of vehicle without establishing a technological monopoly. Therefore, the existing technological monopoly ensures that there are not enough competitors to make it to the consumer market without creating substantial barriers to entry.
How does this affect the way that consumers purchase cars?
The way that consumers purchase cars directly results in the monopoly created by a consumers’ market. If there are not enough manufacturers in a market, consumers will not be able to obtain a car through any means other than being provided with the option to choose from a limited number of manufacturers. Since purchasing a car through a manufacturer increases the company’s profits, it becomes easy for a manufacturer to become established and grow into a substantial market share. Without establishing a technological monopoly, the auto industry would experience a much lower level of competition and higher costs of production.
The second reason: why the industry is considered a pure monopoly involves the fact that there are a few key players in the industry. Although there are many distributors and manufacturers in the industry, it is rare that there are enough of them to create a significant level of competition. Without having to rely on distributors or manufacturers to provide the company with raw materials and labor, a company can rely on a limited number of sales outlets to provide the final touches to their products. Without these last-minute, last-chance purchases, a company relies on its reputation and image to generate new sales.
The third reason: why the industry is considered an oligopoly is that it has significant barriers to entry. Oligopoly creates significant cost savings by preventing over-supply and reducing distribution costs. However, these savings are usually passed on to customers through reduced pricing or increased product features. Without having to rely on major distributors and manufacturers, a small company has no need to incur significant overhead costs to establish a competitive edge.
In the end, it is the lack of overhead costs that creates the ability for the industry to offer consumers the lowest prices in the industry.