Final Paper 2
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, Wonk’s 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 benefit’s the stakeholders involved, such as the government, businesses, and
consumers. ...view middle of the document...
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 prevail.
Final Paper 4
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...