Final Paper

The Final Paper Richard Fields Principles of Microeconomics Sean Bedard-Parker November 12, 2012

Final Paper Final Paper It was the year 2007, and the potato chip industry in the Northwest was competitively structured and in long-run completive equilibrium. Firms were earning a normal rate of return and were competing in a monopolistically competitive market structure. In 2008, a couple of lawyers quietly purchased all the firms and began operations as a monopoly called Wonks. To operate efficiently, Wonks hired a management consulting firm, which estimated a different long run competitive equilibrium. The new company is now run as a monopoly, and this paper shall explain how this benefits the stakeholders involved, such as the government, businesses, and

consumers. Furthermore, given the transition from a monopolistically competitive firm to a monopoly, I will explain the changes with regard to prices and output in both of these market structures. Lastly, an explanation about which market structure is more beneficial for Wonks to operate in, and if this will be the same market structure that will benefit consumers. In any market transaction between a seller and a buyer, the price of the good or service is determined by supply and demand in a market, (Asmundson, 2010). Supply and demand are in turn determined by technology and the conditions under which people operate. Economists have formulated models to explain various types of markets. The most fundamental is perfect competition, in which there are large numbers of identical suppliers and demanders of the same product, buyers and sellers can find one another at no cost, and no barriers prevent new suppliers from entering the market. Prices can change for many reasons.

Final Paper The relationship between the supply and demand for a good (and service) and changes in price is called elasticity. In monopoly situations, there usually is a barrier natural or legal to potential competitors. For example, utilities are often monopolies. In perfect competition a firm with lower costs can reduce its price and add enough customers to make up for lost revenue on existing sales. Monopolistic competition requires specialized inputs because some product differentiation is compatible with perfect competition, (Carson, 2006). If we think of a good or service as a bundle of attributes, each different product could be a different combination of the same attributes. Perfect competition in the supply of each attribute could then result in perfect competition in the supply of products. Firms would be price

takers, even though no two supply exactly the same good or service. It is when each firm imparts a unique attribute to its output one not exactly copied by any other supplier and therefore one which has no perfect substitute that we leave the world of perfect competition, both in attributes and in products. In order to supply an attribute that no competitor is able to provide, either a firm would have to be protected by a barrier that gives it a cost advantage in supplying this attribute, or else the advantage would have to come from possession of at least one indivisible input that is specialized to this attribute, and therefore to the firm's product. Since there are no entry barriers under monopolistic competition, each seller must be the sole possessor of one or more specialized inputs. Without these product specialized inputs, it is hard to explain why monopolistic rather than perfect competition prevails.

Final Paper The Benefits of Monopoly to Stakeholders A monopoly may produce at a lower cost than a competitive industry. This is due to economies of scale, which a monopoly is able to utilize more than a competitive firm, as the monopoly is the sole provider of that good, whereas in a competitive industry the firms share the total output. They have the ability to set prices at levels they desire, in order to achieve a larger abnormal profit. However, firms are not entirely able to charge a price they consider fit for the manufactured goods, since it is constrained by its demand curve. A higher price will result in a decline in demand, and that may consequently lead to a drop in revenue. The existence of long-run abnormal profits can give the enticement to invest more heavily in research and development. This investment may yield a better product to the

consumer. It may also bring a lower cost to the consumer as eventually the monopoly can use it to give a return on the initial capital cost. The capability to utilize consumers would come from high prices charged to the consumer. A monopoly is capable to gain abnormal profit in both the short and long run, as long as the firm's average cost is lower than its average proceeds. By doing this, prices will be at a low level, so as to put off potential firms from joining the industry as they know that they would not be able to produce at such a low cost, this benefits the consumer, as there is a lower price available. Monopolistic competition is a market structure in which there are many firms sell products that are similar but not identical. For example the marketing of potato chips.

Final Paper

There are many companies selling the similar products (chips) and competing for the same costumers, (Case, Fair, Oster, 2009). Sellers can enter the market freely so that the market is less profitable. On the other hand, each bag of chips has different genre and name. So, each supplier has different consideration of how much to charge. In monopolistic competition, one can see the following combination of characteristics between monopoly and perfectly competitive market: * Many sellers. Many firms competing for the same group of costumers. * Product differentiation. Each producer offers products that are not the same. Instead, being a price taker, each producer follows the downward sloping curve. * Free entry. Firms can enter or exit without any restriction. According to economics, a monopoly is a firm that produces a product for which there are no close substitutes and in which significant barriers exist to prevent new firms from entering the industry. By purchasing all firms involved with the potato chip industry the two lawyers created a pure monopoly. A pure monopoly would allow the two firm owners to control the whole industry. By seizing control of the market, the firm would now control their position on the market demand curve. They control everything from output quantity, to price point and their only limit to production would be cost of production. When a firm controls there position on the demand curve, the firm has over all power as to what and how much product is produced. By operating as a monopoly there is no difference between the industry and the firm. The firm is now the industry, so all decisions are ultimately decided by the firm.

Final Paper The result of this can be price discrimination which will impact consumers and

suppliers. All economists divide market conditions into four major categories, monopoly, pure competition, monopolistic competition, and oligopoly. In a monopoly, a single company supplies a product or service for which buyers cannot find a close substitute. A monopoly may arise when one company can supply a given product more cheaply than two or more companies can. Natural monopolies often include utilities that provide electric power, gas, or water. Internet shopping has tended to break down monopolies, because buyers have access to companies around the world. When operating as a monopoly Wonk potato chip firm has created a market that cannot be interfered with by potential competitors. A monopoly is a market structure in which there is only one producer and or seller for a product. Our textbook defines a monopoly as an industry composed of only once firm that produces a product for which there are no close substitutes and in which significant barriers exist to prevent new firms from entering the industry, (Case, 2009). By purchasing all firms involved with the potato chip industry the two lawyers have created a pure monopoly. A pure monopoly is an industry with a single firm that produces a product for which there are no close substitutes and in which significant barriers to entry prevent other firms from entering the industry to compete for profits. By seizing control of the market, the firm would now control their position on the market demand curve. They would control everything. When the firm controls the position on the demand curve, then the firm has all the power as to how much of the product is being produced.

Final Paper Marketing is an organizational function and a set of processes for creating, communicating and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders. In free and open markets, a firm will enjoy an advantageous market position, or competitive advantage, only if its customers perceive that the firm offers the highest value proposition available in that market. While a competitive advantage translates into a superior market position, it can best be conceptualized as the foundation upon which a firm competes. When a firm initially creates a competitive advantage, it holds a favorable, but transitory, market position based upon its ability to create superior customer value by efficiently and effectively meeting explicit market needs through product differentiation, lower cost alternatives, more rapidly satisfying its customers, or through a symbiotic combination of these factors. Thus, the managerial imperative of competitive advantage mandates that firms strategically deploy their unique sets of resources and distinctive competencies in areas such as quality, innovation, efficiency, and customer responsiveness in order to financially outperform their competitors, (Miles, Darroch, 2006). When operating as a monopoly there is no difference between the firm and the industry, (Case, 2009). The firm becomes the industry; all the decisions are then decided by the firm. A monopoly increases prices for consumers and slows growth and

development in the industry. In a monopolistic environment, businesses no longer have a need to compete, either in terms of pricing, servicing, or completive advantages, which will affect consumers.

Final Paper Monopolies tend to stabilize the market, which is great for stakeholders who while may no longer see increased revenue, but have continuing profits. It is possible that the government could obtain an anti-trust suit against the industry so as to formally break up the businesses, (Case, 2009). Prices will increase because of lack of competition from other companies within the industry, and output may either slightly decrease or remain steady. Its not smart for a monopolistic industry to flood the market, since the gain of profits would lower the price and increase costs. The most beneficial is likely a monopoly, if the businesses merge together or an oligopoly, (a form of industry, market,

structure characterized by a few dominant firms). This market structure would not benefit consumers who would rather see monopolistic competition because it would allow for no buyer or seller barriers to entry, and significant companies for competition.

Final Paper References Asmundson, I. (2010). Supply and demand. Finance & Development, 47(2), 48-49. Retrieved from http://search.proquest.com/docview/577305512?accountid=32521 Carson, R. (2006). On equilibrium in monopolistic competition. Eastern Economic Journal, 32(3), 421-435. Retrieved from http://search.proquest.com/docview/198077342?accountid=32521 Case, K. E., Fair, R. C., & Oster, S. E. (2009). Principles of Microeconomics. (9th ed.). Upper Saddle River, New Jersey: Pearson Prentice Hall.

Miles, M. P., & Darroch, J. (2006). Large firms, entrepreneurial marketing processes, and the cycle of competitive advantage. European Journal of Marketing, 40(5), 485-501. doi: http://dx.doi.org/10.1108/03090560610657804