Monopolistic Competition - Term Paper Example

The paper also explains the fact that given the transition from a monopolistically competitive firm to a monopoly, what will be the changes with regard to prices and output in both of these market structures. And finally the paper explains given the transition from a monopolistically competitive firm to a monopoly, what will be the changes with regard to prices and output in both of these market structures. Benefits to the stakeholders: The price, output level, and the quality of the monopolistic competitor are resolved through “maximizing the difference between its revenue and its cost, where cost is measured exclusive of the rent on its product-specialized inputs” (Carson, 2006, p. 433). Such a business organization must have definite inputs that are specific to its definite product—as product differentiation is or else compatible with the perfectly competitive market—and the exclusivity of these inputs permits those producers to gain positive rent, yet in the long-term equilibrium.

The addition of rent in the cost provides increment to the “traditional Chamberlinian solution”, where (“rent inclusive”) average cost lays tangent to the level of demand and thus downward-sloping. However, if rent is not included, average cost can be constant or even it can be upward-sloping at the equilibrium, and also, monopolistic competition does not necessarily induce ‘excess capacity or to production facilities that are too small’ (Carson, 2006, p. 433). In this context, the company, called ‘Wonks’ will not produce the monopolistically competitive level of output which is largely based on the competitive market conditions.

The firm will produce the level of output which is lower than the perfectly competitive amount of output; however, it will produce an output even lower than the monopolistically competitive level of output. Hence, the amount of price charged by the firm for potato chips will be much higher than the two competitive market structures. Hence, the amount of profits will be the highest in case of the production and sale of potato chips. Hence, this would benefits some of the stakeholders associated with the business organizations; however, this outcome will worsen the optimal level of benefit of some other stakeholders.

The government of the country would benefit in the sense that the increased level of profit of the business organization will increase the amount of corporate profit tax earned by the business organization. Hence, the government would benefit in terms of the greater revenue earned. However, the government would loose in respect to the fact that some people, who are unable to purchase the product at higher prices, would either reduce their volume of purchase of the product, or stop purchasing the product (Boone and Kurtz, 2011, p. 98). The other business organizations also face loss or profit from the monopolization of the potato chips company.

In the situation, where the original company has significant level of reputation as the economic agent of selling most popular potato chips, the market share of the new company would like to be very high. In this situation, the other business organization would suffer in terms of reduced market share which will reduce the amount of pro