Why is the auto industry considered an extreme monopoly? It provides very little differentiation in the marketplace. It typically has only major barriers to entry. It usually depends upon price variation for new entrants to bring new customers into the marketplace. It also depends largely on brand loyalty to make sales to past customers. 

The auto industry is a technological: monopoly because all of the components that go into creating a vehicle can be found in car manufacturing plants anywhere in the world. Because all components are derived from the same suppliers, there is little cost effective differentiation between cars. Even if each car manufacturer went into business with their own components, the cost of starting a competing business would still be too high for the established players in the industry. They would then have to engage in expensive marketing campaigns to sell their products to consumers. 

A second reason: why the automobile industry is considered to be an extreme form of a monopoly is because it has significant barriers to entry for new entrants. None of the established players are willing to take the risk of investing in resources to build the company’s reputation and customer base in the U.S. It is not likely that they will invest the additional resources necessary to expand their manufacturing facilities outside the U.S. The high entry costs and significant resources required to compete with Asian countries make it unlikely that they will be willing to take the risk of doing so. The result is that they are forced to develop vehicles and components from components produced elsewhere at higher cost levels and using resources not available in the U.S.. It is not possible to develop, test, and produce components for the production of a vehicle in the U.S. without spending significant amounts of resources. 

A third reason: why the industry is considered a pure monopoly is because it lacks any real or perceived competition. The only real threat to the high priced prices charged by the established manufacturers is the introduction of lower priced vehicles produced by smaller manufacturers that lack the resources and technological expertise to meet the manufacturer’s high standards. If the current trend continues, the industry will face serious threats from new entrants who offer lower priced vehicles that perform as well as or better than the established players. If such entrants are unable to provide the resources or technology necessary to maintain a stronghold on the automotive industry, the result will be the immediate and temporary demise of the industry. 

The fourth reason: why the industry is considered an extreme form of an oligopoly is because the high cost of starting a competing business are too high. There are two factors at work here. One is the cost of purchasing equipment and labor needed to start and manufacture the products. The second is the high cost of maintaining a pipeline of suppliers and drivers to service the products once they are ready to sell. The high fixed cost of doing business contributes to the notion that established players are able to charge high prices and maintain substantial profit margins while a new entrant must pay either a premium to gain access to the manufacturer’s product or service, or spend a great deal of time and resources trying to woo customers away from the established players to drive up sales. 

The last factor – the absence of true or potential competition – is perhaps the most important reason that why is the automobile industry considered an extreme form of an oligopoly. The very nature of the industry ensures that there is a limited amount of real, realistic competition. In order for new entrants to become established and gain access to the manufacturer’s products and service, the company must be able to provide a better price – one that is consistent with other manufacturers – as well as better service. The absence of true or potential competition provides the company with a secure defense against entry by lower-priced competitors, ensuring a nearly level playing field on which to establish itself.