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Wonks: Monopolistically Competitive Market to Monopoly - Research Paper Example

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There are a lot of advantages for that a firm can exploit from changing market structure. These advantages are beneficial not just for the firm itself, but all the stakeholders have something to benefit from it. …
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Wonks: Monopolistically Competitive Market to Monopoly
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Download file to see previous pages In this case, the firm structure has changed from monopolistically competitive to monopoly. After the successful takeover of the potato chips industry, a new firm called “Wonks” has taken over the operations of the entire industry and changing the market structure from monopolistic competition to monopoly. Monopolistic Competition is a situation characterized by large number of buyers and sellers. However, the sellers differentiate their products from other sellers and the products are not homogenous. All the firms in the industry earn supernormal profit in the short-term and normal profit in the long run. Similarly, monopoly is a situation characterized by large number of buyer and only one seller. In this case, the seller charges whatever price he wants to since consumers have no other alternative, but to buy the expensive goods offered by monopoly. As a result, a monopoly always earns super normal profits. (Daft, 1994) The major advantage of a monopoly for the stakeholders is that it saves the wastage of resource. In a competitive market, there is a lot of advertising and over-lapping of resources. However, there is no advertising or over-lapping of resources in a monopoly. This saves the scarce resources which can later be used for the production of goods and services and can translate into lower prices for consumers. Hence, monopoly benefits not just the firm itself, but it helps the consumers and the government in the efficient allocation of scarce resources. Scarce resources are saved and their wastage is minimized as there is no over production of goods which can happen in a competition as each producer produces goods separately. Since monopoly is a single seller earning large amount of profits, it provides the seller enough capital for research and development. This again leads to efficient use of resources and cost cutting for the consumers. The government is also benefitted as it does not have to spend on research on development from its own pocket. Monopoly is also beneficial for the firm itself. It gives the seller good control over the market. While competitive structures are price takers, monopoly is not a price taker. This will enable “Wonks” to earn large amount of profits and the owners of the firm will benefit greatly from the changed structure of the industry. (Bamford, 2003) Since monopoly is a power in itself, it will exploit consumer for the benefit of the firm itself. It will produce an output which will be lesser than the previous output of the potato chips industry. “Wonks” will produce fewer packets of chips than the previously competitive industry to charge higher prices and earn large amount of profits. Monopolistically competitive industry would have been producing. This can be represented in the following diagram: It can be seen in the above diagram that it is the forces of demand and supply that dictate the prices and output in the markets. However, in the monopolistically competitive market the products are different and differentiated on special features and therefore producers have a room of charging a little premium on their product. However, when the market structure changes from competitive to monopoly the producer gains a lot of power. The seller dictates the prices and depending on the price that is being charged output is determined. This result in higher prices being charged as compared to a competitive market and output also decreased from q1 to q2. Hence, the shift from monopolistic competition to monopoly can be defined as higher prices and lower output in the market. (Lipsey and Chrystal, 2004) The best structure for any company, let alone Wonks, is monopolistic structure. The reason why this ...Download file to see next pagesRead More
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