Question

Why Need a competitive marketplace?

Answer 1

The higher the market power of firms, the more the price-setting ability of the firms since competition is less. As a result, consumer surplus is lower and producer surplus is higher, which leads to social inefficiency loss. On the other hand, the more competitive a market is, the less market power an individual firm has, and its pricing control ability also falls since consumers have more substitutes to switch to. Therefore, consumer surplus increases and social inefficiency loss decreases. At the extreme, a pure competitive firm maximizes efficiency because in this market structure, consumer surplus and producer surplus are maximized, eliminating inefficiency loss and maximizing efficiency and welfare.