Final answer:
Firms tend to make industries more consolidated through mergers and acquisitions, leading to a reduction of competitors and an increase in market power. This can shape the industry into a monopolistic competition or an oligopoly with few dominant firms. Governments must balance the efficiency gains with the competition loss in such scenarios. Hence, the correct answer is option (1).
Step-by-step explanation:
Firms often aim to alter the industry structure for their benefit, such as making industries more consolidated through mergers and acquisitions. When firms merge or one firm acquires another, two previously independent companies become a single entity, often resulting in a reduction of competition and an increase in market power for the newly created firm. This consolidation can decrease the number of competitors in a market, potentially leading to oligopolies where a few firms dominate the market.
In monopolistic competition, firms continuously innovate and differentiate their products to attract consumers, but this can lead to higher costs for society in terms of excessive advertising and marketing. On the other side, oligopolistic markets, while fewer in number, are characterized by high market power where firms' decisions can significantly impact the market, often engaging in collusion to restrict trade.
Governments face the challenge of balancing the efficiency gains from large-scale production and the potential loss of competition due to business growth through mergers and acquisitions.