Question

Assuming identical long-run costs, what is the difference between the prices and outputs in the long run under pure competition and under oligopoly? How might the Department of Justice view a merger between equals in a purely competitive market versus an oligopoly market? Why?

Answer 1

In the long run, regarding the pure competition, price = MR = MC = ATC and it causes to achieve economic profit to be zero and firms achieve allocative as well as productive efficiency in the market, but in oligopoly, the long run can make market to be a monopoly where output will be produced at MR = MC. But price may be higher than the MR in the long run. It can make oligopoly to make positive economic profit in the long run.

DoJ view positively of a merger between firms in the pure competition as firms are price takers and market is highly competitive due to free entry and exit of the firms. Here, merger can bring operational efficiency and resource utilization efficiency in the market.

But, Oligopoly has few players, with entry barriers and high market concentration. Hence, DoJ is skeptical about the merger in oligopoly and DoJ stringently scrutinizes the merger and then gives its final verdict on merger.