Restructuring Potato Chip Industry - Research Paper Example

? Restructuring Potato Chip Industry Restructuring Potato Chip Industry A company experiences major changes that affect work and consumers when it alters its market structure. Consequently, it is necessary to address the changes that occurred in 2007 when the industry underwent competitive re-structuring. The industry was earning a Normal Rate of Return because it was contending in a monopolistically competitive environment. In order for the industry to operate efficiently, two smart lawyers bought the firm and named it Wonks. They started to operate it as a monopoly industry in 2008. The lawyers hired a firm to estimate varied long-run competitive equilibriums to ensure the successful operation of their business (Swanson, 2009). However, the adapted strategies may not be superior and appropriate. Benefits to the government, business and consumers A monopoly market occurs when a single company supplies services or products that the buyer cannot substitute. The situation mainly happens when one company supplies commodities cheaply compared to other companies. Most monopoly companies include the utilities that offer electric power, gas or water. Wonks would benefit different stakeholders especially the government, business and consumers based on its monopolistic tendencies. Initially, the company will benefit the government because monopolies act as convenient sources of revenue for the government. The government can force companies out of the market causing controversy in the marketplace. The administrators at Wonk can force the government to come up with restrictions governing the market competition (Graham, Kaye & Rothstein, 2006). However, other companies in the market can propagate negative publicity that may serve as a barrier to Wonk. As a result, the total revenues of the industry to the government will increase Once the firm started running as a monopoly, it came up with different Long-Run Competitive Equilibriums (Graham, Kaye & Rothstein, 2006). These changes benefitted the industry’s stakeholders because they controlled the amount of goods released to the market. Additionally, the industry can control its production, supplies and selling prices to the consumers (Graham, Kaye & Rothstein, 2006). The absence of competition means that the company could increase prices to cover the cost of production. Consequently, the parties involved will draw additional revenues. The consumers will also because Wonk will stipulate prices that the consumers are willing to pay. Graham, Kaye & Rothstein (2006) indicate that the consumers will stop purchasing the products when the industry stipulates prices that the consumers are unable to pay for the goods and services. Changes in prices and output in both structures The potato chip industry restructured from the monopolistic competition strategy to strict monopoly. The competitors sell slightly heterogeneous products but compete for the same customers based on monopolistic competition (Graham, Kaye & Rothstein, 2006). This strategy presents reduced obstacles in market entry and exit. This means that the company was exposed to threats of competition and market fluctuations in the external market. The reduced market entry barriers had the potential of destabilizing the business if a more preferable competitor enters the market. Through monopolistic competition, the producers were constrained from acquiring the full market information (Graham, Kaye & Rothstein, 2006). This is because the market has inputs from other competitors that influence market fluctuations. Any new input by the competitor affects the demand curve of other competitors. Consequently, the consumers must determine the price and non-price attributes of the products supplied. The competing producers must select unique traits that attract customers to their products and realize the targeted higher prices (Boyes & Melvin, 2012). Monopolistically competitive markets engage in imperfect competition by focusing on non-price competition aspects such as product differentiation. Their ability to determine prices is the primary advantage of monopolistic competition (Mankiw, 2011). The potato chip firm opted to operate as a monopoly. Through monopoly, they would counteract the competition and product differentiation factors encountered in the monopolistic competition. This may realize radical changes in pricing. This is because they can acquire the full market information that is necessary for market research and projection of future demands. In a monopoly market, there is only one entrance for products into the market (Mankiw, 2011). The producer controls the supply of goods or services under restrictive conditions. This facilitates easy determination of prices with little or no consequences. Lack of outside competition discourages self-regulation in pricing and price controls. Moreover, monopoly firms have the advantage of restricted outputs. This allows them to impose price controls on their products. They can supply their products without worrying about the price and non-price qualities of their products. This is beneficial to the producers because they can introduce changes in their products and maintain market control (Graham, Kaye & Rothstein, 2006). The monopolistic competition engages in branding to enhance reliability and familiarity with their clients. Monopolies do not require detailed branding because they have their market niche already determined (Boyes & Melvin, 2012). Monopolies can determine the full market information about demand and supply of their products. This allows for planning and projection of the market needs. Therefore, the Potato chip industry can assess the market size efficiently through the sufficient supply of market information (Mankiw, 2011). Beneficial Market structure Wonk should apply monopoly market structure because it has the capacity to enhance operations. This would allow it to influence the prices of merchandise and services. The industry will limit new competitors from joining the market. This would increase its total profits when it adapts the monopoly market structure. This strategy would also allow the industry to operate within an oligopolistic market that permits it to dominate production and determine the prices of products and services (Orbanes, 2006). Applying monopoly in the industry will lower the risks involved in the business and increases the profits. The market structure will limit consumer choices because monopolist controls the supply making the consumers purchase the industry’s supplies. Applying monopolist structure will enable the industry to exploit its positions by charging high prices because it knows that consumers have no other alternatives. According to Orbanes (2006), the structure will be beneficial to the industry by giving it powers to restrict market output and exploit its dominant position. Wonk will experience higher profits at the expense of economic efficiency, the wellbeing of the customers and the society based on its monopolistic tendencies (Boyes & Melvin, 2012). This structure may not sufficiently address the client’s needs and satisfaction. The standard rule in a monopoly is that the overall prices are higher than the marginal and average costs. This may result in inefficiencies and the collapse of the market because the final prices are always above the cost of production inputs (Boyes & Melvin, 2012). The products could be under consumed because consumers may choose to forgo its benefits. Lack of competition lessens the zeal to create new products or consider the customer’s welfare. However, consumers may benefit from monopoly through their acceptance of a specific standard price that is acceptable. An upward shift from this price may reduce sales and threaten the firm’s existence (Mankiw, 2011). Conclusion The shift by the potato chip industry to a monopoly is significant to the viability of the firm. The monopolistic competition increased rivalry based on market differentiation by other competitors. However, it promoted free market benefits such as reduced prices and innovative products. The firm adopted the monopolistic strategy that increased profits and control by the company but reduced the consumer’s choices. It is clear that a pure monopoly is likely to limit the variety of products from the market that the consumers can access. It is fundamental to acknowledge that the contemporary society may not thrive based on monopolies. References Boyes, W. J., & Melvin, M. (2012). Microeconomics. Mason, OH: Southwestern Cengage Learning. Graham, J., Kaye, D., & Rothstein, P. J. (2006). A risk management approach to business continuity: Aligning business continuity with corporate governance. Brookfield, Conn: Rothstein Associates. Mankiw, N. G. (2011). Principles of economics. Mason, Ohio: Thomson Southwestern. Orbanes, P. E. (2006). Monopoly: The world's most famous game - and how it got that way. Cambridge, Mass: Da Capo Press. Swanson, K. (2009). AP human geography. New York, NY: Kaplan. Read More