Assume you are a government watchdog. What would make you think a company is trying to...

Assume you are a government watchdog. What would make you think a company is trying to exert monopoly power in a market?

The main premise of the free market economy is to lower regulation and let companies compete for providing the best products and services in the marketplace. How would regulation improve competition or reconcile with the spirit of capitalism? Explain.

How many firms would be needed to create a competitive environment? How many would be needed for a perfectly competitive environment? Is it possible to ever have a perfectly competitive marketplace? Provide examples of markets with perfect competition.

Expert Solution

Generally, it is very easy to understand when a company is trying to exert monopoly power. When a company is enjoying monopoly power, it has the power to determine prices. If a company has exclusive control over the production of goods and services and is increasing the prices constantly, it would mean that it is exerting monoply power.

Regulating the competitive market ensures that anti-competitive practices are discouraged. The regulation also ensures that the consumers are not marginalised. Also, competition is an important feature of capitalism as consumers have a wide variety of goods and services provided at competitive prices. Regulation places restrictions on business activites and promotes competition.

There is no number of firms that is needed for it to be characterized as a perfect market. A perfect market is where there are many sellers and buyers and the product is identical. Competitive markets can be seen in real life but it is not usually possible that markets are perfectly competitive. One of the reasons behind this is that perfectly competitive market requires products to be identical which is not always possible. For instance, even bottled water varies from seller to seller in terms of purification. However, competitive markets can be seen in real life in markets where there are many buyers and sellers. Usually, agricultural products are seen as competitive markets because a single farmer cannot influence prices.

Rahul Sunny answered 2 years ago

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