83. The conclusion that oligopoly is inefficient relative to the competitive ideal must be qualified because

A. industry price leaders often select a price equal to marginal cost.
B. over time oligopolistic industries may promote more rapid product development and greater improvement of production techniques than if they were purely competitive.
C. increased output due to persuasive advertising may perfectly offset the restriction of output caused by monopoly power.
D. many oligopolists sell their products in monopolistically competitive or even purely competitive industries.

Question

83. The conclusion that oligopoly is inefficient relative to the competitive ideal must be qualified because

A.  industry price leaders often select a price equal to marginal cost.
B.  over time oligopolistic industries may promote more rapid product development and greater improvement of production techniques than if they were purely competitive.
C. increased output due to persuasive advertising may perfectly offset the restriction of output caused by monopoly power.
D. many oligopolists sell their products in monopolistically competitive or even purely competitive industries.

BlackTom AI · Accepted Answer

To assess why the conclusion that oligopoly is inefficient relative to the competitive ideal must be qualified, we need to examine each statement.
Option A: 'industry price leaders often select a price equal to marginal cost.' This is generally incorrect for oligopolies. While some price leadership models exist, oligopolies typically set prices above marginal cost due to market power, strategic interaction, and desire to maintain profits. Therefore this claim overstates a tendency of oligopolies and does not justify QUALIFYING the inefficiency conclusion.
Option B: 'over time oligopolistic industries may promote more rapid product development and greater improvement of production techniques than if they were purely competitive.' This is a positive note about dynamic efficiency. In some oligopolies, firms invest in innovation and process improvements due to expectations of sustained profits, competitive rivalry, and barriers to entry that can reward breakthroughs. If true, such dynamic gains can offset static inefficiencies, or at least require nuance in the overall assessment of welfare relative to perfect competition. This makes the qualification plausible.
Option C: 'increased output due to persuasive advertising may perfectly offset the restriction of output caused by monopoly power.' This suggests that advertising can neutralize reduced output. However, advertising typically increases demand or shifts perceived value rather than mechanically increasing output to the level of perfect competition. It does not strictly offset reduced output due to monopoly power; in many cases advertising adds costs and may not fully compensate for lower quantities. Hence this claim is not a reliable general justification for qualification.
Option D: 'many oligopolists sell their products in monopolistically competitive or even purely competitive industries.' This statement mixes market structure observations with the nature of oligopolistic firms, but it misstates how oligopolists operate. Oligopolists are not characterized by selling in competitive regimes; they themselves hold market power within an oligopoly. This option does not support the need to qualify the inefficiency conclusion.
In summary, A ignores the typical pricing behavior, C overstates the offsetting role of advertising and is not a universal mechanism, and D confuses market structure with the industries in which oligopolists participate. B stands out as a plausible mechanism by which dynamic (long-run) efficiency gains could occur in oligopolies, thereby necessitating a qualified view of their inefficiency relative to perfect competition.

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