Oligopolies are INEFFICIENT!

Remember the triple equality for economic efficiency:
P = MC = minimum ATC
Oligopolies do not satisfy this. Many oligopolies sustain nice economic profits year after year.

Productive Efficiency and Allocative Efficiency:

• Oligopolies often sustain economic profits.
• They produce where P > minimum ATC so they are not productively efficient
• They produce where P > MC so they are not allocatively efficient
• This means that in oligopolies, firms neither produce in the least costly way nor produce the right amount of a product according to society's wants.
• At this price, output is below the output at which minimum ATC is reached. There is an underallocation of resources.
• Oligopolists are less desirable than pure monopoly because government usually regulates pure monopoly.
  
  

Some believe oligopolies to be less desirable than monopolies:

• Governments usually regulate pure monopolies so prices are not too high
• Governments usually do not regulate oligopolies, yet if collusion occurs among oligopolies, near-monopoly prices and outputs may be produced behind the facade of competition.

Qualifications:

• Increased foreign competition has helped stimulate more competitive pricing, stimulate much more competitive pricing.
• Limit pricing, or pricing below the short run profit maximizing level in an effort to strengthen entry barriers, keep prices closer to MC and minimum ATC.
• Technological advance, funded by the oligopolies' economic profits, allow for better production techniques and products. The short run inefficiencies of oligopolies may be offset by new and improved products, prices, and costs.