2007 Potato Chip Industry Northwest Competitively Structured Essay
- Length: 6 pages
- Sources: 4
- Subject: Economics
- Type: Essay
- Paper: #43868554
Excerpt from Essay :
2007, potato chip industry Northwest competitively structured long-run competitive equilibrium; firms earning a normal rate return competing a monopolistically competitive market structure.
The competitive business environment of today forces economic agents across the globe to develop and implement a wide array of strategies by which to respond to the challenges of the various stakeholder categories, such as competitors, business partners, employees, customers, the governmental and non-governmental institutions and so on. One particular means by which the companies address these new challenges is that of uniting their forces in order to combine their resources, market shares and capitals and as such become more profitable. Particularly, the economic agents engage in mergers and acquisitions as a means of consolidating leading positions within the market places.
Such a situation was observed within the potato chip industry in Northwest. Up until 2007, the industry was characterized by the presence of several companies, acting as independent firms and competing against each other in a monopolistically competitive market structure.
During 2008 nevertheless, two lawyers in the region bought all the firms and united them into a single organization, which now dominates the industry and operates as a monopoly; this new entity is called Wonks and it relies on the advice of specialized management consultants. These new consultants estimated a different competitive equilibrium within the long-term.
In such a context, a question is being posed relative to the impact of this move onto the local market place. More specifically, emphasis is placed on the following:
The benefits of the potato chip monopoly for the stakeholders
The changes in prices and output within the industry, and last
The more beneficial market structure for Wonks to operate in.
2. Benefits for the stakeholders
As it has already been mentioned, the stakeholders include a wide array of individuals, such as customers, employees, business partners and so on, all of which are impacted by the activities of the firm. The changes within the potato chip industry are expected to generate a series of impacts for the stakeholders, most of them nevertheless with negative connotations, as a result of lost competition. For instance, as the monopoly is installed, the firms operate as integrant parties of the same company, and no longer compete against each other. This could lead to a standardization of the product offer, the stalling of innovation or even an increase in retail prices (Speegle, 2009).
Aside from the negative impact of the monopoly, fact remains that this new market structure also generates some notable benefits for various stakeholder benefits. The first and foremost important example in this sense is represented by the advantages felt by the shareholders. These represent parties who possess stakes in the firms and who receive parts of the profits. In this new setting then, the profits of Wonks are likely to increase as a result of monopoly and lost competition, meaning as such that the dividends received by the share owners will be increased. In other words, the stock holders will register increased financial benefits.
Another benefit is revealed at the level of the overall community and society and it is reflected in a more efficient allocation of the resources, which, in turn, materializes in better environmental sustainability. For instance, when the operations in one industry are concentrated in a monopoly, the firm will seek to create operational efficiencies, and will plan and more efficiently allocate and use the resources. This will materialize in lower levels of resource consumption when compared to a situation in which the resources are consumed by more companies.
Also at the level of the society, the monopoly reveals the advantage of centralizing more resources, and generating more profits, which can be further reallocated to create social benefits. For instance, the firm pays its taxes, which are redistributed within the society. And the firm also possesses more resources to invest in research and development, which stimulates innovation (Pettinger, 2008).
3. Changes in prices and output
Up until 2007, the potato chip industry in the Northwest has been characterized by a monopolistic competition, which means that the industry was characterized by four important dimensions, as follows:
The companies in the industry were all creating and selling similar products, yet these items were not perfectly substitutable
The industry was open to new entries by other parties
The firm sin the industry sought to all maximize their profits, and last
All firms in the potato chip industry had some degree of market power, meaning as such that none of them was a price taker (Ivestopedia, 2013).
With the creation of Wonks however, the competition was eliminated and the market became dominated by the single monopoly. This modification resulted in a series of changes, such as those previously mentioned within the market. At the level of the industry, changes are however also observed at the level of outputs and prices.
In terms of the product outputs, in the context of a monopolistic competition, the products created by the firms revealed some differences, meaning as such that they were of an increased variety, from which the customers were able to purchase those items which best served their needs.
In the context of the monopoly, this diversity of the output is expected to decrease, as Wonks would focus more on the standardization of its production efforts. This endeavor of standardization is economically sound in the sense of generating cost efficiencies and the advantages of the scale economy, which in turn lead to the previously mentioned benefits (e.g. A better allocation and use of the resources).
In the context of the prices, the shift from a monopolistic competition to a full monopoly translates into an increase in the retail prices. This phenomenon is explained by the desire of the monopoly to maximize its profits, and also the absence of competition to drive prices down. Since Wonks would be the only potato chip producer in the region, it will be able to control prices, and even more so, raise them without concern.
Ultimately, economic imbalances would be created in the case of the monopoly. In a traditional competitive market place, the price and the output would be established based on the economic principles of demand and supply. With the creation of the monopoly however, the prices and the output would be controlled by the firm, with less importance towards economic principles.
4. Market structure
The current situation has revealed two distinctive market structures, namely the competitive market and the monopoly. Each of these structures is more advantageous for two parties, namely the company and its customers. At the level of Wonks, the more advantageous structure is clearly represented by the monopoly and this is due to the fact that it allows the company to operate without any competition. It controls the industry, dominates the markets, controls the resources and maximizes its profits through discretionary pricing.
Still, for the customers, this market structure is a disadvantageous one, with them preferring the competitive structure. Through this structure, the economic principles would be better respected and the customers would enjoy a series of benefits, such as those listed below:
Increased product variety and diversity
Price competition, which creates lower and more accessible retail prices
Support and drive for innovation and continuous development, which materializes in higher quality services, as well as added opportunities for development within the industry
Increased consumer choices, meaning that the buyers are presented with wider selections of products from which to choose those that best serve their needs and wants
Increased competitive position for the overall Northwest potato chip industry within the greater competitive market place (Website of the European Commission, 2012).
The changes within the business society have led to an increasing popularity of mergers and acquisitions, through which economic agents seek to strengthen their competitive positions. Such is the case of Wonks, a monopoly constructed with the purchase of all potato chip companies in Northwest.
The general perception of a monopoly within the market place is that its impacts are negative due to the loss of competition within the market. Still, it must also be noted that there are several advantages to a monopoly, and these are revealed at the level of several categories of stakeholders. For once, a monopoly results in higher profits and dividends for the stock owners, increasing as such their financial gains. Then, the Wonks monopoly will also ensure a more efficient allocation and use of the resources, to as such better support environmental responsibility and sustainability. The higher profits generated by the firm can be reinvested to generate social benefits, and also to promote research and development initiatives.
In terms of the changes in prices and outputs, it has to be noted that these are influenced by the approach of the market structure to the economic principles. More specifically, in the case of a competitive market structure, the price and the output are dictated by the economic principles of demand and supply. In the case of a monopoly however, where Wonks is the…