Benefits of Monopoly for the Stakeholders - Essay Example

Macro and Micro economics Market structures This paper involves analyzing different market structures. This is to measure their suitability for their use by Wonk’s. It involves an analysis of a monopoly and the benefits it brings to the stakeholders involved such as the government, consumers, producers and businesses as a whole. It also analyzes the price and output changes that will arise as a result of transition from monopolistic competition to a monopoly. This paper also proposes the best market structure to be taken by Wonks in the potato chip industry so as to benefit all the stakeholders. Monopoly is a market structure where a firm controls the industry in regards to output and prices and there are no close substitutes to the products. Monopolistic competitive is a market structure where there are many buyers and sellers who trade in a range of prices. This is because the sellers can differentiate their offers to different customers (Orbanes, 2007). Monopoly is not the best market structure to be considered in the current world of business. A monopoly has different benefits to the stakeholders such as the government, consumers, producers and businesses as a whole. Monopoly benefits to the producers and businesses are that it increases normal profits to abnormal profits. A monopoly produces at a lower output and sells at high prices. This reduces the marginal cost of the producer which increases the profits to supernormal profits. The businesses also benefit from a monopoly in that they produce at large scale which leads to economies of scale. The economies of scale will lead to a reduction in average cost, which will lead to, increase in profits. The economies of scale have potential gain in welfare to the producer. The large scale production will reduce the firm’s costs, which will result, to benefits in the long run. The shareholders also benefit from monopoly through receiving dividends, which result from, super normal profits. The firm benefit in terms of control meaning the firm controls the entire market which means it is the sole decision maker in the industry. The firm benefit for being the dominant one in the industry in that it decides on the prices of the products. The firms in the industry are price takers (Robinson, 1943). The firm does not suffer from over production because it produces below the equilibrium. The firm produces only what is required by the consumers. The benefits to the government that arise from the monopoly are as follows. The government earns high taxes this is as a result of the firm producing below the equilibrium. This leads to a deadweight loss from both consumers and producers which are transferred to the government as the taxes. These high taxes result from the company’s production at large scale. The monopoly benefits to the consumer are as follows. Production in large scale result to improvement in economic welfare, where consumers benefit from buying at lower prices as the producer increases profits. Improvement of products as a result of research and development consumers benefit by getting an improved product. This is as a result of a monopoly investing part of its super profits in research and development. The resources under monopoly are efficiently utilized. This is as a result of one firm in the industry, which produces below, equilibrium meaning it can not exploit the resources. Monopolies use price discrimination as one of their marketing method. This is a benefit to consumer in that consumers who earn low incomes benefit from buying at low prices. Those who earn high incomes pay high prices for the same commodity. Price discrimination increases a firm’s profits and increases its sales. The consumers also benefit from international where a monopoly experiences competition from international firms. This forces the monopoly to maintain low prices so as not to lose their share of market; therefore, consumers continue to enjoy low prices of commodities (Brady, 1979). After Wonks, buys all the other firms in the potato chip industry there will be a transition period before a pure monopoly is formed. The output of the perfect competition and monopoly will be affected as follows in the transition. Under perfect competition, the firms will aim at producing at the point where marginal cost=marginal revenue (MC=MR) at this point firms are earning maximum profits. At this point, all companies are earning profits which are normal or abnormal. This prevents new firms to entire into the market. The firms, which earn losses, are forced out of the market and can not find their way back in the market. This is due to their incapability to cover variable cost, which means they, can not continue to operate. The exit of firms creates a monopoly through the strongest firm which is earning abnormal profits. In perfect competition prices and output are determined by forces of demand and supply but this is different in the monopoly. The monopoly produces at the same point as perfect competition where marginal cost=marginal revenue (MC=MR). The firm price is determined by its average cost (AR) where they intersect with the output. The firm is the price maker in the industry meaning it has the power to decide on price and output. The pricing behavior of a monopolist is determined by the elasticity of its demand curve which is downward sloping. In the transition, period as Wonk take charge of the market its products demand will increase, as a result, exit of firms from production. This increase in demand will lead to a rise in output which will result in an increase, in prices. This can be explained as follows. The firm will increase its production, which will result, to high average cost leading to high prices. The firm’s revenue will also increase which means the firm will continue to earn abnormal profits because it maintains the same costs (Orbanes, 2007). The market structure, which will increase, Wonks benefits is oligopoly. Oligopoly this is a market structure that fall between perfect competition and a monopoly. Under oligopoly few firms dominate the market for a good or a service, this makes their decisions have a lot of interdependence meaning that a decision of one firm is followed by a similar decision from rival firms. A decision of a firm has a noticeable impact in the rest of the market. Oligopoly is beneficial to all stakeholders; therefore, Wonk should embrace by letting the firms compete with each other. The firm will benefit by earning high profits because of a large share of the market. The government will earn high taxes from many firms that are in the market. The consumers will benefit from low prices, which result from, competition of the firms in the market. The competition will lead to improvement of production; therefore, the consumers will have quality products (Fellner, 1949). In conclusion, monopoly has its benefits, but it should not be embraced for use in the current world of business. It has its disadvantages, which include it leads to exploitation of consumers through high prices. The consumers choice is restricted due production of only one product. Lack of competition may lead to inefficiency a firm may not invest in improving its products. Labor is exploited when price is high and marginal cost is low, and the workers receive low salaries. Monopolies increase their prices when they want this increases the consumer exploitation. The government should regulate the power given to monopolies. This is through annual price controls which will monitor the prices of monopolies (Orbanes, 2007). The government should also subsidize other firms, which will compete, with monopolies to eliminate their control of the market. Wonk should embrace oligopoly which works towards eliminating the shortcomings of monopoly, which will lead, to efficiency. Oligopoly has a lot of benefits to all stakeholders as discussed above; therefore, it is immensely beneficial. With the shortcoming, of the monopoly discussed oligopoly should be embraced. Monopoly is not best market structure to be used in the current world of business. References Brady, M. 1979. The monopoly book: Strategy and tactics of the world most famous game. New York: D. McKay co. Fellner, W. 1949. Competition among the Few: Oligopoly and similar market structures. New York: Alfred .A. Knopf. Orbanes, E.P. 2007.Monopoly: The world’s most famous game and how it got that way. New York: Da campo press. Robinson, G.A, 1943. Monopoly. London: Cambridge university press. Read More