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The question of which market structure accrues most benefits for all stakeholders can be attributed to a number of factors. There are four major market structures, but for the purpose of this assignment, focus is on monopolistically competitive and monopoly markets structures. “Wonks” is a conglomerate of many potato chips companies, which initially operated as monopolistically competitive firms in potato industry in the Midwest in 2007.
These firms were that run on equilibrium such that they achieved a normal rate of return, improved efficiency and other advantages which accrue added benefits to all stakeholders. However, in 2008 the firm were conglomerated into “Wonks” by two lawyers and thus operated in a monopoly market structure. As a monopoly “Wonks” accrues a number of benefits ranging from long term economic profits, market protection among others.
However, in a monopoly market structure, the social cost of a monopoly to both the stakeholder and the consumer is much higher than the cost of monopolistically competitive firm. Both monopolistically competitive market and monopoly structures offer certain advantages to “Wonks”; however, the company needs to revert to monopolistically competitive structure to accrue more benefits to both the entrepreneurs and consumers.
From monopolistically competitive market structure to a monopoly
To bring up all the potato chips producers together meant that the market structure was changed from monopolistically competitive to a monopoly. This shift in market structure significantly affects the relationship between the input, the output and commodity prices. In the monopolistically competitive markets, various potato chips makers established competition on production efficacy rather than on pricing.
Hypothetically, one of the competitors enhances production efficiency more than others, thus leading to competition. Efficiency is further enhanced by increasing the output (production) at minimum cost of production (Mankiw, 2011; Taylor, 2009). This has a direct impact on the cost and quantity of commodities; increasing output means only minimum increases in cost of production. Thus, the average cost of production is lowered.
In a monopolistically competitive market, price (which is equal to marginal revenue) is determined by market demand among other factors. This implies that each of the competitors may sell as much commodities as it can on the current market price. This is achieved by improving production efficiency (and thus lowered cost of production).
This phenomenon is further compounded by the existence of more than one type of demand; demand seen by a particular competitor and the actual demand for the commodity. As such, to survive in a monopolistically competitive market, potato chips makers had to product-differentiate.
This creates several types of demand for each of the products. Therefore, there are short term profits but on the long term there would not be any economic profits since with time, the demand for that differentiated product decreases while the cost of production increases. Thus, competitors are likely to increase prices of good without losing market share (since price must equal marginal cost).
The reorganization of the markets structure from monopolistically competitive to monopoly has several implications. While there are many determinants of monopoly, this type of monopoly is attained by having complete control of basic resources (potatoes) by one owner, “Wonks.”
To begin with, it is imperative to state that the shift in market structure affects the demand-supply mechanism. In a monopolistically competitive market structure there are various types of demands. These demands are determined, by the number of competing interests within this environment, thus production is based on product differentiation. However, in a monopoly, there is only one demand; the demand as perceived by the single seller (Mankiw, 1998).
As such, there is only one demand for potato chips, which is only defined by “Wonks”. This phenomenon is as a result of several factors. However, bringing all potato chips markers together mean that there is only one producer, in this case “Wonks”, who not only fails to product-differentiate but also becomes the only seller of potatoes chips. Monopolies esteem to produce as much goods as possible to supply the demand as they see it.
This also means that monopolies draw all the profits there is within their given markets (Lindeman, 2001). Since “Wonks” monopolizes production, demand and supply of potatoes chips, they are also able to monopolize prices with the aim of generating as much profits as possible. As such, for monopolistic business owners, there are direct financial returns.
In monopolistic markets structures, the government becomes a major stakeholder, either directly or indirectly. Regardless of this fact, the government stands to gain from market monopoly. In many countries, governments allow monopolies to operate, for both economic and political.
Controlling resources creates market entry barriers, since no competitor has access to those resources. However, most monopolies need government protection to create legal market entry barriers. This is usually aims at protecting monopolized markets from entry by external forces. While this to protect local entrepreneurs, it also benefits the government in two broad ways. First, the government protects local entrepreneurs, thus helping to build local production capacity.
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This is usually good for economic growth. Secondly, in the process of protecting local markets from infiltration by external producers, the government negotiates higher taxes payable by monopolistic firms. As such, in most countries, companies that have market monopolies end up paying relatively higher taxes, in return for protection against competition (Mankiw, 2011). Thus governments benefit in form of increased revenue from higher taxes paid by companies within monopolized market structures.
With time, companies within monopolized market structure realize that while they have the absolute power to adjust prices to suit their profits targets, such adjustments do have a general effect on total revenues. For instance, monopolies have the power to adjust prices upwards since they do not have any competitor which might offer price competitive goods. While this is aimed at increasing profits, it also has a negative effect on total revenues.
Unlike in competitively monopolistic markets, in a monopoly Price increase means that fewer consumers will be willing to buy those goods. In the long run, this reduces a company’s total revenue due to reduced sales. In this regard, “Wonks” would realize the need to increase profits through efficient production.
There are two ways through which monopolies achieve this. They either lower the cost of production by reducing wastages or add value to their products by improving on the product quality. Since Quality goods ensure the best value for money, customers are likely to pay more for those goods (Mankiw, 2011). In this case, by improving the quality of potatoes chips, “Wonks” benefits its consumers. As such, similar to monopolistic competition, consumers benefit from high quality goods as well as improved efficiency of production and delivery.
However, by conglomerating all potato chips makers into “wonks”, the Midwest potato chips market structure shifted from monopolistically competitive to a single monopoly market structure. This means that the output-input-price mechanism is changed. As explained earlier, in a monopoly, there is only one demand (the demand seen by the producer) and thus no product differentiation (Lindeman, 2001).
Thus, “Wonks” would only produce its own brands of potato chips. Unlike a monopolistically competitive market where profits are only sustained on the short term, monopolies are able to sustain profits for a long time, since there is no price competition. This is facilitated by the fact that there are strict market entry barrier and thus no chance for sharing those profits. Unlike a monopolized competitor, a monopoly operates at a level where marginal revenue is equated to marginal cost of production.
This also implies that either reduction or increase in a unit of production leads to increased profits; adding a unit of production increases revenues more than the cost of production while reducing a unit of production reduces the cost of production, thus increasing the profits (Lindeman, 2001). This is in stark contrast to a monopoly where a reduction in a unit of production is likely to increase the cost per unit of production.
“Wonks” is formed with a monopoly market structure in mind. However, the major question is on the cost of both the monopoly as well as monopolistically competitive market, and which of the two is most efficient for both the company and consumers. A monopoly has several inefficiencies.
For instance, inefficiency is achieved through setting the price of commodities above marginal cost, leading to higher prices as compared to monopolistically competitive market (Mankiw, 2011).
As such “Wonks” is likely to hike its prices. Additionally, monopolies accrue added expenses in terms of higher than normal taxes paid to government as kickback for market protection. While monopolies achieve productive efficiency, the level of such efficiency cannot be compared to the type of efficiency achieved in monopolistically competitive markets.
In a monopolistically competitive market structure, efficiency is achieved mainly through product differentiation as well as one of the ways of reducing the cost of production. As such, the more the competitive the market is, the more efficiency production becomes (Taylor, 2009).
This results not only to higher quality commodities which assure consumers of the best value for money. Due to this “Wonks” is likely to produce potato chips at a higher cost per unit (and eventually priced higher) than a monopolistically competitive firm. Additionally, product differentiation is common in monopolistically competitive markets. Thus this is likely to result to innovative products, which also add value to consumers’ lives.
Additionally, product differentiation ensures that there are numerous alternative commodities (Taylor, 2009). This increases the choice of consumer products, unlike in a monopoly where commodities have absolute distinctions (thus no choice of consumer products). Monopoly markets only have one demand; the demand as seen by the monopoly firm.
However, for a monopolistically competitive market there at least two types of demand; demand created by each competitor and the actual market demand for the product. In this case, while it seems a smart move to conglomerate all potato chips makers into a monopoly, for more benefits to the firm as well as the consumers it would be imperative for them to revert back to monopolistically competitive firms (Lindeman, 2001).
The purpose of turning “wonks” into a monopoly was to probably control the market and create a market barrier. This would have ensured increased profits, since price is slightly higher than the marginal costs. However, while monopolizing the potato chips market seems like a smart idea, it is more costly to both the firm and consumers of potatoes chips.
Therefore, the two lawyer need to rethink their decision and revert to monopolistically competitive markets structure, in a monopoly there are fewer benefits to all stakeholders, limited productive efficiency among others limitation. This will ensure a more stable consumer friendly market.
Lindeman, J. (2001). EZ-101 Microeconomics. Arkansas: University of Arkansas
Taylor, A. (2009). Principles of microeconomics: global financial crisis edition. Mason, OH: South Western Cengage Learning
Mankiw, G. (1998). Microeconomics. Orlando, FL: Ted Buchholz
Mankiw, G. (2011). Principles of economics. Mason, OH: South Western Cengage Learning