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Introduction:

An oligopoly is a form of a market in which there exist only a few sellers in the market, this form of a market exist due to government restrictions, natural oligopolies due to the long run average cost and other restrictions. The oligopoly market has a kinked demand curve. This is due to the price collusion by the firms in the market.

The car market in the European Union assumes an oligopoly market rather than a perfect market, it is evident that the car market in the European Union is an oligopoly market although this is bound to change in the near future, this is according to the BBC news website which is an article by the European union commissioner Monti Mario. [1] This paper discusses why the European Union car market is an oligopoly market with regard to average cost curve.

Oligopoly market in the European Union:

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One of the reasons why the car market in the European Union is an oligopoly is due to rules set in the market. This follows the rule to except only a few distributors in the car market, this has led to the oligopoly market in the European Union car market. This is bound to change in the near future in order to liberalise this market, the restriction were to improve consumer price and also make the cost of repair and after sales service more cheaper and easier.

The kinked demand curve:

In an oligopoly market a firm is faced by a kinked demand curve which can be explained by the reaction by rival firms as the price changes, when the price is increased by one firm the other firm will not increase the prices and therefore the demand for the firm will be elastic, when there is a reduction in prices by the firm then firm will experience an inelastic demand curve.

The diagram below shows the kinked demand curve experienced by a firm in an oligopoly market

Price Pr is the price charged by the firm’s rivals an increase in price means the firm ill experience an elastic demand curve and a decline in prices means the firm will experience an inelastic demand curve [2]

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The cost curves:

The diagram below shows equilibrium in an oligopoly market:

The above diagram shows the equilibrium in an oligopoly market, the profit is the area under P0, Pe= Pr, and Qe. The diagram shows a situation where the price of rivals is equal to the equilibrium price. Therefore the level of average cost will determine the profit levels of a firm in an oligopoly market, [3]

The envelope curve:

The envelope curve shows the short run and long run cost curve and depict the most optimal level of production. The curve depict that as the level of output of a firm increase in the long run there is decline in the costs of production until the optimal level of production where the costs are minimised, from this level of production if the quantity increases then the costs will from this point rise.

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The above curve shows the short run and long run average cost curve, the cost Co is the optimal level of cost achieved by producing at the optimal quantity Qo. [4]

The average cost curve argument:

For a firm in an oligopoly to produce at the minimum cost possible then the quantity produced has to be at Q0, if the market as not an oligopoly then the quantity produced by a single firm would be less than Q0 and assuming that the level of production is at Q1 then the cost of production would be higher for all firms in the market. The high level of cost osf production will result into an increase ion the final price of the goods in the market.

Also if the quantity produced by the firm is more than Q0 then the level of cost will be high and at the same level of cost as Q1, this will result into an increase in the cost of production and as a result there will be an increase in the final goods in the market.

Therefore the existence of an oligopoly market in the European Union car market will result into protection of the customer from being over charged by other type of markets that may exist, when the number of firms and distributors dealing with cars then the level of production will not be optimal and therefore as depicted by the envelope curve the price of the final goods will rise.

The other argument is that if the car market was to be converted into a competitive market the cost of production will raise, when the price rises then the cost of final goods will rise and the costs of repair will rise and there the customer will not maximise his or her utility. As a result the

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market will not properly allocate resources and in this case it will be inefficient.

Conclusion:

It is evident from the average cost curve that the car market in the European union is an oligopoly market because of one restrictions by the union and second the average cost theory, the average cost curve depict that there is a certain level of production where the cost pf production is minimised and any decline or increase in the level of production will lead to an increase in the level of cost of production. This is why the car market in the European Union is preserved as an oligopoly market where we have few producers and distributors of cars in the market.

The production of cars involve high level of costs and at the same time high levels of final prices, if the market was converted to be a competitive market then the firms in the market will produce below the optimal level of production and therefore the cost of production will be high, high levels f production cost depict high levels of final prices to consumers. This will lead to market inefficiency and market failure and therefore it is important that the market remains as an oligopoly market.

European Union

European Union

References:

Brian Snow (1997) Macroeconomics: introduction to macroeconomics, Rout ledge publishers, UK

BBC (2007) European union market, retrieved on 16th November, available at http://news.bbc.c o.uk/1/hi/business/1775384.stm

Stratton (1999) Economics: A New Introduction, McGraw Hill Publishers, New York

Philip Hardwick (2004) Introduction to Modern Economics, Pearson Education Press, UK