Suppose a market is initially perfectly competitive with many firms selling an identical product. Over time, however, suppose the merging of firms results in the market being served by only three or four firms selling this same product. As a result, we would expect what?

Question

Nylah Frost

Business

11 April, 14:01

Suppose a market is initially perfectly competitive with many firms selling an identical product. Over time, however, suppose the merging of firms results in the market being served by only three or four firms selling this same product. As a result, we would expect what?

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Answers (1)

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Jasmin Mueller · Answer 1

The price level will increase and the output will decrease.

Explanation:

In a perfectly competitive firm, there are large number of buyers and sellers selling identical products. No single firm can affect the price level, all the firms are price takers. There is allocative and productive efficiency in the market.

If overtime because of mergers, few firms are left in the market, the market becomes an oligopoly. In an oligopoly the firms are price makers. The price level in such as market is higher than the socially optimal level and the output level is lower.