In oligopoly, we have many models of market behaviour based on different sets of assumptions and predicting different results. That is why it is not possible for us to say precisely about the efficiency of the oligopolistic markets, treating it as one entity.

However, we may consider the following points:

First, in all oligopoly models, firms produce their output at the minimum possible cost because they abide by the principle of cost minimisation subject to output constraints. This does not mean, of course, that they produce uniquely at the minimum long-run average cost (LAC).

Hence, an oligopolistic firm requires more resources per unit of output than what might have been needed had it operated at the minimum point of its LAC curve. Furthermore, since the firm under oligopoly normally enjoys pure economic profit, price of its product is higher than both average and marginal cost. Thus, in equilibrium, the buyers pay for the marginal unit of the good more than the marginal cost of production.


In other words, if the price were equal to marginal or average cost, the buyers would be willing to buy more than the producers would be willing to sell. We may conclude then that oligopolies, in general, do not produce an efficient output level. Second, the producers under oligopoly spend huge resources on advertising and on the creation of quality and design differentials.

There is no doubt that allocation of some re­sources for these purposes are justified. For example, if advertising is done to let the people know what are the products, who sell them and at what prices, it serves to spread important and necessary information and it is justified.

Similarly, certain quality and design differentials may be socially desirable. However, it is strongly felt empirically that the oligopolists push all forms of non-price competition beyond the socially desirable limits.

Since nothing is seen to the contrary, it may be reasonably concluded that the markets under oligopoly might have worked more efficiently and the buyers would have been better off if there were more active price competition and less non-price competition.


On the basis of the above considerations, we may say that the markets under oligopoly, in general, are not able to achieve optimisation of welfare for the buyers and for the society as a whole.