What happens when firms combine to act as a profit maximising monopoly?
When two or more firms combine to gain and maximise profits, they are said to collude. This is unlikely in a more competitive or more contestable market situation. Collusion is most likely in an oligopolistic situation or a duopoly. There are several forms of collusion, the most obvious is price-fixing, any form of price fixing is illegal, another method is to limit output. By limiting output firms benefit from increased price but lower quantities of output, hence consumers lose out but the firms gain. This is also illegal and would lead to an investigation by the competition commission. Game theory is a good way of estimating output of two firms which are in an oligopoly. Furthermore, if you mean that the two or more firms merge from a competitive situation to a single monopolistic company, then as market share of the new company would be over 25% (a pure monopoly has 100% market share, as this is unrealistic the government defines a monopoly to have 25% market share) the competition
