Perfect competition displays the market mechanism at its best in many respects, yet most markets in operation today are monopolistic or oligopolistic, composed of a few large firms. Should government regulation break up those large firms into several smaller firms to try to achieve perfect competition? Why or why not?

Answer 1

Perfect competition prevents firms from earning excess profits and forces them to produce the output quantity at which average cost is as low as possible. It has other beneficial effects, as well. In monopolistic or oligopolistic markets, a few large firms may charge high prices that yield large profits, but they may produce output quantities that do not match consumer preferences.

Many economists and regulators believe that the achievement of perfect or near perfect competition is a desirable goal, and that regulated firms should be required to come as close as possible to it in their behavior. But they do not all agree. Even if a perfectly competitive market were sustainable, it is not necessarily desirable, and may be an impossible goal.

Moreover, large industries are characterized by economies of scale, which yields cost savings, and a lower price to consumers. Breaking up these large enterprises would force them to lose their economies of scale, which would increase costs, and thus the price to consumers.