Principles of Microeconomics - Research Paper Example

a single buyer in the entire business setting. Entry in such a market is restricted as a result of high cost or due to impediments which may be social, economic or even political. For instance the government can opt to create a monopoly over an industry. On the other side, monopolistic competition is generally a type of imperfect competition in that the competing producers sell products which are totally different from each other as goods but not necessarily perfect substitutes (Kamien 1982).

Therefore, in a monopolistically competitive market, different firms can behave as if they are monopolies in the short-run by using market power to generate more profits. Later in the long-run, once other firms enter the same market, the benefits will be shared among them and the overall profit due to differential will considerably decrease with increase in competition. Having understood the basic principles about monopoly and monopolistically market structure, now it is very easy to anally the case in hand.

As mentioned in the question, that in the year 2007 potato chip industry was operating as under monopolistically market. . In most cases, it is argued that a multi-producer monopolist will always charge a lower price as compared tom firms operating separately producing the same complement products (Ralf 2000). As a result of lower pricing, demand will be higher since more customers are encouraged to buy at a lower price. The result is that, in the long run is that there will be a shortage of production because monopolistic generally produces less product than that society efficient level of output.

In the long run, the price of commodities will be much higher due to less supply in the market. The strategy here is that, profit made earlier and being part of the surplus, it is transferred from consumers to the producers and this creates a social cost which arises from inefficiency low output that ends up to a dead weight loss. Immediately after transformation into a monopoly market the result would be realized within a short duration. For instance, due to monopoly the prices charged are much higher because there is no close substitute for the product.

Those are at a disadvantage are the low income consumers who might be exploited by such a monopoly market where prices are a bit higher (Mckenzie 2008) Thought to producer high prices contribute to increase in the profit made by the firm. These benefits will be transferred to stakeholders whose main objective is after profit maximization. Though that may be the case, but sometime, a firm may not enjoy the domestic monopoly power, rather face an intense competition from other oversee producers.

This tends to limit their market power and instead help in keeping prices lower for the consumers. Once manager has received such profits both in the short run and in the long run, they will distribute it