Why is the automobile industry considered an oligopoly?

Why is the automobile industry considered an oligopoly?

a. It offers little differentiation within the market.

b. It has significant barriers to entry.

c. It is controlled by companies that patent key technology.

d. It relies on price variation to attract customers.

e. It depends on brand loyalty and image to generate sales.

f. It is dominated by a few key players.

Answer: The correct answers are b and f.

The automobile industry is considered an oligopoly primarily due to two key factors: entry and the presence of strategic actions that can be dominated by several companies.

Starting a new automobile company is capital-intensive because a lot of money has to be spent on the development of new models, factories, supply channels and market networks. These high costs present significant challenges that explain why it is impossible for new firms to easily enter the market. Also, the industry exhibits economies of scale, meaning the larger organizations within the industry can produce at a lower cost and thus pose an even greater threat to potential entrants.

The market of automobiles is characterized by a large number of producing companies, although the really large companies are limited to a few in numbers, including Toyota, Volkswagen, Ford, and General Motors. These organizations occupy a large percentage of the market and they can shape the direction of the industry, policies, and innovations. This is a clear indication that the market is oligopolistic and that many of the market’s key attributes lie in this concept that a few firms dominate a certain line of products.