Why is the Automobile Industry Considered an Oligopoly?

There are few large companies in the automobile world that have a monopoly, which almost always leads to no competition, and thus higher prices. This configuration is called an oligopoly – a few huge manufacturers produce most cars sold worldwide.

What is an Oligopoly?

Oligopoly is a type of market where a small number of firms have a large market share, and their decision-making is interdependent; they tend to limit the impact on the industry. In an oligopoly, a few firms have a lot of power in an industry, as compared to the control of a monopoly (one firm) or a duopoly (two firms). In the automotive sector, firms like VW, Toyota, and GM are a prime example.

Barriers to Entry

The auto industry has high barriers to entry due to the costs of building automobile factories and developing new vehicle models. “These investments also come with huge upfront costs in facilities, equipment, labor and supply chains, making it difficult to enter and capture market share for new competitors.

Integration flows and market-oriented pricing

The auto industry shows similar mutual interdependence between firms so that the strategic decision of one manufacturer has been affecting others. For instance, when one automaker cuts prices or boost incentives, the rest usually follow. These interdependent behaviors originate from the oligopolistic structure, which means all players engage in strategic pricing tricks that raise prices above levels they would be if competition were allowed to run its course.

International Pricing and Promotion

Companies exploit diverse market situations in individual nations to cover different expenses for indistinguishable items. This enables companies to maximize profits globally. Moreover, the industry invests a lot of money to have a loyalty in the advertising, which has to be treated as a unique case of a product, even though the same product can be equal-product. This marketing tactic hopes to engage consumers in thinking about brand identity rather than comparing corporate prices.

Consolidation and Mergers

Behemoths in the automobile industry collude through mergers, acquisitions and joint ventures, giving them the ability to expand while keeping newcomers out. Research, manufacturing, and distribution joint ventures are also common. In an oligopolistic market, this consolidation strategy allows to retain pricing power.

Conclusion

The automobile industry is one of the best examples of an oligopoly market structure, where a few large companies dominate the market and restrict competition. As such, prices are artificially high, and consumers are less likely to reap the rewards of competition. The oligopolistic nature is exacerbated by the industry's heavy dependence on advertising and strategic pricing, underscoring the necessity of regulatory oversight to establish equitable competition and provide consumers with more options.