Regulation of markets

When competition cannot be trusted to discipline firms — natural monopoly, collusion, or consumer harm — governments regulate. Regulation can cap prices, set quality and safety standards, or break up and police cartels. Collusion is the particular danger in oligopoly: firms that should compete instead agree to fix prices, share markets or rig bids, acting jointly like a monopolist. Worked example: two firms with marginal cost 20 face demand P = 100 - Q. Competing, they might produce more; colluding as a monopolist they set MR = 100 - 2Q = 20, giving Q = 40 and P = 60, splitting monopoly profit of (60 - 20) x 40 = 1600 between them — which is also why each is tempted to cheat and expand.