Why is the Automobile Industry Considered an Oligopoly?

A handful of huge, interlinked automobile companies use their size and marketing tactics to block competitors, keep prices high, and dominate the worldwide market while making big profits.

The global automobile industry is a prime example of an oligopoly market structure. An oligopoly refers to a market dominated by a small number of large firms. In the auto industry, a handful of massive manufacturers produce the majority of cars that are sold worldwide. 

What is Oligopoly?

Oligopoly is a type of market structure characterized by a small number of dominant firms that collectively hold a large market share. These firms engage in strategic decision-making and limit each other's impact on the industry. Unlike a monopoly where one company controls the market, or a duopoly where two firms dominate, an oligopoly exists when a few companies hold considerable power in an industry, as observed in the automotive sector.

The barriers to entry in auto manufacturing contribute to the concentrated industry. Building automobile factories requires enormous upfront investments in facilities, equipment, labor, and supply chains. Developing and producing new vehicle models is also extremely capital-intensive. These high fixed costs make it exceedingly difficult for new competitors to enter and gain market share.

In addition to barriers to entry, the auto industry exhibits mutual interdependence between firms. Strategic decisions by one manufacturer influence others. For example, when one company lowers prices or increases incentives, others tend to follow suit. Firms also watch each other's product features, technologies, and marketing tactics closely. This interdependent behavior stems from the oligopolistic structure.

The oligopoly structure of the auto industry leads to strategic pricing tricks. Prices stay artificially high thanks to the lack of real competition. Consumers pay more than they would if there were lots of competing firms. 

They also charge varying prices based on country. Cars with similar features and manufacturing costs end up selling for very different amounts in different countries based on local taxes, import fees, and market conditions. This allows firms to maximize profits globally.

The industry spends a lot on advertising to make their brands seem unique, even if their products are actually quite similar. Companies want customers to be loyal to their brand name instead of shopping around for the best price. Automakers invest billions in flashy ad campaigns that promote perceptions of quality, status, or driving experience for their brands. 

For example, BMW emphasizes performance and precision engineering in its "Ultimate Driving Machine" ads. Toyota promotes reliability and safety with its "Let's Go Places" slogan. Ads like these are designed to get consumers to focus on brand identity instead of comparing prices between companies. This heavy marketing is another strategy oligopolies use to maintain control over pricing.

Leading Automobile giants consolidate power through mergers, acquisitions, and strategic alliances. Massive corporations like Volkswagen, Toyota, and General Motors dominate by acquiring or partnering with smaller companies. Joint ventures for research, manufacturing, and distribution are also common. These strategies allow them to grow while blocking new entrants.

Conclusion

The automobile industry functions as an oligopoly because there aren't many rivals. There is limited room for competition in this oligopoly because a small number of powerful companies control the majority of the market. As a result, one may describe the auto business as an oligopoly. Although monopolies may benefit consumers, they do not bode well for the environment.