The Global Financial Crisis of 2007-2008 hit the American automobile industry severely. General Motors, Ford, and Chrysler, the "Big Three", who embodied industrial excellence and manufactured much of the equipment that had defeated Japan and Germany more than sixty years ago, were reduced to begging the federal government to prevent their bankruptcy. But there was little discomfort in the executive suites of Stuttgart and Toyota City as they realized that the very success of the Big Three automakers created the conditions for the American industry's undoing and recognized their own vulnerability. Moreover, Korea and China emerged as formidable competition, blessed with lower labor costs. In 1945, the men who had just pulled off the biggest and most successful industrial mobilization in the history of the world began to construct the biggest and most profitable oligopoly the world had ever seen. Economies of scale and competition on the basis of advertising, marketing, styling and other tools of non-price competition difficult for the small fry to match, enabled the Big Three to squeeze out their smaller rivals like Packard, Hudson, Nash, and Studebaker, excellent manufacturers all. The most acclaimed production genius of the home front was Henry Kaiser, an entrepreneur who had built Liberty Ships with mass production techniques. Converting the famous Willow Run bomber assembly line plant to automobile production, Kaiser tried to break into the business, but Kaiser Motors was driven from the American market in a mere ten years. During the 1950s and 1960s, the Big Three ruled the automotive world and made big profits, as oligopolies often do. Big three management, arguably the most powerful executives in America and the world, faced a worthy bargaining adversary in Walter P. Reuther, whose United Auto Workers Union monopolized their labor supply. Reuther took advantage of his monopoly position by playing the three rivals off against each other. He would target one manufacturer at a time - - the one he deemed most likely to cave in. The union would go on strike against that company and drive the market share to its two competitors. Although management would put up a struggle at every stage, wages rose and rose, and benefits multiplied. The high labor costs created a lot of trouble when the oligopoly was challenged and broken by foreign competition. The first danger sign came with the growing success the Volkswagen Beetle enjoyed in the American automobile market. Detroit tried to compete at the small and inexpensive end of the market, but it wasn't very easy to make money on competing with (then) lower wage foreign labor. To Volkswagen, Toyota, and many other auto makers struggling to catch up to Detroit in the 1950s and 60s, GM, Ford and Chrysler appeared mighty beyond compare. In the mid-1960s, government planners and the Japan's Ministry of International Trade and Industry tried to force the much smaller Japanese automobile manufacturers to merge together, in order to be able to more effectively compete with GM and the other giants, as the Japanese expanded into global markets. Fortunately for the Japanese automobile industry, the bureaucrats bullied only two companies into merging -- Nissan and Prince Motors, which went on to lose significant market share to Toyota. Japan's auto industry remained fragmented and highly competitive, if not nearly as profitable as Detroit's.

1. Managers should understand the full implications of 'Economies of Scale' as it provides the justification for the nature and shape of long-run average cost curve (LRAC) along with its other variants like constant returns to scale and diseconomies of scale. It can also provide support for monopoly power as it shows that production in a large firm can be more rewarding than several smaller firms. It can also cause an effective barrier to entry in industries characterised by oligopoly though factors such as economies of scope, R&D expenditure, patents, and other legal barriers may also exist. Elucidate the statement with necessary illustrations.

2. Many studies such as the above case expressed scepticism ("The fruits of oligopoly can be lush, but like all fruit, they ripen and eventually spoil") about the outcome of oligopoly. On the other hand, Kinked-demand curve (Sweezy oligopoly) and Leadership models (Stackelberg oligopoly) establish more stable price and output behaviour in oligopoly. Briefly review (a) Kinked-demand curve model and Price leadership model with assumptions clearly stated and (b) comment on the performance of oligopoly in the real world.

3. What are the characteristics of monopolistic competition? Explain how excessive expenditure for advertising and product varieties in the industry can cause inefficient outcome in the long run.