) What are the sources of oligopoly? (5 Marks)f) Why are monopoly firms inefficient?

a) Sources of Oligopoly:

1. Economies of Scale: Large firms can produce goods and services at a lower cost than smaller ones. This makes it difficult for new entrants to compete, leading to a market dominated by a few large firms.

2. High Entry Barriers: These can be due to high startup costs, access to key technologies, or regulatory constraints. These barriers prevent new firms from entering the market, leading to oligopoly.

3. Ownership of Key Resources: If a few firms own or control key resources necessary for production, it can lead to an oligopoly.

4. Network Effects: In some industries, the value of a product increases as more people use it. This can lead to a few firms dominating the market.

5. Mergers and Acquisitions: When firms merge or acquire others, it can lead to a concentration of market power in a few firms, resulting in an oligopoly.

b) Monopoly firms are considered inefficient due to the following reasons:

1. Lack of Competition: Without competition, monopolies can set prices higher than in competitive markets. This leads to allocative inefficiency as the price does not reflect the true cost of production.

2. X-Inefficiency: Monopolies may not have any incentive to minimize costs as they do not face competition. This can lead to x-inefficiency, where output is not produced at the lowest possible cost.

3. Productive Inefficiency: Monopolies may not produce at the minimum of their average cost curve, leading to productive inefficiency.

4. Potential for Rent-Seeking: Monopolies may engage in rent-seeking behavior, such as lobbying for regulations that protect their monopoly status. This can lead to a misallocation of resources.

5. Lack of Innovation: Without competition, monopolies may lack the incentive to innovate and improve their products or services.