A monopolistically competitive market structure used to be the normal condition for the potato chip industry in the Northwest section of the United States. In 2008, the firms competing against each other were purchased by a group of investors that merged the firms together to create a monopoly. The company created as a monopoly came from a market that was in a long-run competitive equilibrium with a goal of operating in a state of long-run competitive equilibrium as a monopoly. The company will gain the most benefit from making the change to operating as a monopoly but the change will only benefit a small portion of the stakeholder’s of the company.
A monopolistically competitive industry is identified by easy entry into the market and therefore many firms are the norm (Case, Fair, & Oster, 2009, p. 303). In the monopolistically competitive industry each firm does not create the exact same product or offer the exact service but each firm creates a different version of the same product. Because each product is different each firm can choose to set a different price based on its individual product.
A pure monopoly is identified by a single firm that controls a unique product and because of technological or other barriers has no competition. The monopoly produces under what capacity would be produced in a competitive market at a price higher than what would be the case in a competitive market. The basic difference between monopoly and “perfect competition in its analysis of the behaviour of the firm in one_respect only: the monopolist’s demand curve slopes downward. So also does that of the monopolistically competitive firm, and in long-run equilibrium it is just a special case of monopoly where zero profits are being made. If this analysis does add anything to our understanding of firms’ behaviour it must be because it tells us something about the interactions between firms in an industry, for it tells us nothing new about the individual firm” (Maurya, 2008, p. 178).
Given that the new potato chip company is now run as a monopoly, the stakeholders involved, such as the government, businesses, and consumers will be affected in different ways. Government will be affected because the new potato chip monopoly will produce less than competing firms and raise potato chip prices which will leave less income for investment and other spending. Businesses that do business with the new company will have a huge benefit because of the volume of business however many suppliers will lose out on dealing with the individual potato chip producers. Consumers will be adversely affected by the new monopoly since production will decrease and prices will increase.
The reason that the price will increase under a monopoly is that there is a direct correlation between production and profit in a monopoly. The price of potato chips and the amount of labor will be linked to production since “Any direct increase in profit due to an extra unit of input must be counterbalanced by an indirect decrease via the impact of that extra unit on the concurrent price system. In our set-up, the extent of monopoly power is driven by the current profit, the marginal product of labor and the (positive) quantity A, which captures the consumer’s attitude toward risk over consumption” (Basak & Pavlova, 2004, p. 503)
The best structure for the new potato chip company is to be a monopoly. The monopoly is best for the company because there is no competition and “In a world of perfect competition, there are gains from trade because a country can import things that would otherwise be produced at home at a higher cost. The gains from trade under monopolistic competition need not be from comparative advantage, but rather from achieving greater variety and/or lower costs for those differentiated goods. With differentiated products and free entry, the larger market from international trade allows each country to exploit economies of scale for some selected products but at the same time give consumers even greater variety from other countries” (Roy, 2009)
Figure 1. Comparison graph of monopolistically competitive industry and monopoly (Case, Fair, & Oster, 2009, p. 269)
Figure 1 shows why the new potato chip company will produce less chips and charge a higher price than if the firms remained competitive. The cost curves, marginal revenue curve and demand curve show that the intersection of the competitive supply curve and the market demand curve are controlled by the market in a competitive market. The new potato chip company operating as a monopoly can set any price and quantity combination along the demand curve (Case, Fair, & Oster, 2009, p. 269)
A monopolistically competitive market structure is the normal market in the United States. Monopolistically competitive markets are identified by many firms making similar products. When a market is combined into a monopoly the stakeholders of the company typically do not benefit. When the monopoly is formed the main benefactor of the monopoly is the firm itself. Consumers do not benefit from a monopoly because production is less and prices are higher. The company will gain the most benefit from making the change to operating as a monopoly but the change will only benefit a small portion of the stakeholder’s of the company.
Basak, S., & Pavlova, A. (2004). Monopoly power and the firm’s valuation: A dynamic analysis of short versus long-term policies. Economic Theory.
Case, K., Fair, R., & Oster, S. M. (2009). Principles of microeconomics. Upper Saddle River, NJ: Prentice Hall.
Maurya, M. (2008). Modern microeconomics: Theory and application. Delhi, IND: Mangalam Publishers.
Roy, J. R. (2009). Monopolistic competition. Princeton, Princeton: Princeton University Press.
Originally posted at dtcarguy.com