Given that the new company is now run as a monopoly, how will this benefit the stakeholders involved, such as the government, businesses, and consumers?
The conventional economic case in opposition to a monopoly is that, since the cost structure is the same, a monopolistic business will manufacture goods at a decreased output in order to charge higher prices. The opposite is true in the case of a competitive industry. In a monopolistic market, not only do consumers suffer but also governmental efficiency is questioned (as a result of lower spending and tax rates) (Krugman and Obstfeld, 2008).
Another view of Monopolistic markets is that, manufacturers mostly take advantage of the economies as they produce and supply products and services on large scales which results in the fall of average total cost of the production. However, this fall in average cost ultimately increases the monopoly profits. Consumers also get some benefit by enjoying lower prices as this gain is also used to increase productive efficiency of the company (Krugman and Obstfeld, 2008).
Producers as well as consumers both are benefitted by enhanced economic welfare as provided by the economies of the scales (Krugman and Obstfeld, 2008).
Regulation of monopoly
In order to avoid economic welfare loss caused by the exploitation of the monopoly power, government regulates various monopolies. These regulators not only control the annual increase in the prices but also flourish new competition levels in potato chip industry (Krugman and Obstfeld, 2008).
The potato chip industry enjoys the monopolistic market structure in the Northwest of U.S.. During the year 2008 an investors' group bought the competing potato chip firms and created a new monopoly by merging all firms together. The new company had previously enjoyed a long run competitive equilibrium to be a successful part of a long run economic equilibrium monopoly. However, the newly formed monopoly will prosper more by altering the operations but this situation will only be beneficial for the monopoly of the company only a few stakeholders will gain a little portion of it (Krugman and Obstfeld, 2008).
The entry in a monopolistic market is easy because majority of the firms are present in the industry (Case, Fair, & Oster, 2009, p. 303). Exactly same products are not produced by the firms in a monopolistic market; in fact the same goods are manufactured by each firm but with a different touch. And as each product is different, therefore each firm sets a different price for its product. Thus a variety is offered to the customers by the potato chip industry as well (Krugman and Obstfeld, 2008).
An individual company which regulates an exclusive commodity and due to technology or some other obstacles has no rivals is said to be operating in a pure monopoly. In monopoly a product is produced in such circumstances as would have been produced in a competitive market at a greater price as compared to what its price would have been in a market where competition id present. The main point of change between 'perfect competition' and monopoly is in its evaluation of the in which a firm reacts on one aspect only: the demand curve of the monopolist moves downwards. This is also the case with the monopolistically competitive firm. In the long-term stable situation, it is only a distinct instance of monopoly where no profits are being generated. This analysis should enhance our appraisal related to the way a firm is acting. The reason is that it teaches us, to a certain extent, about the communication between the firms in a market. Besides this, it gives no information about the single firm (Maurya, 2008, p. 178).
In the context of the potato chip company, it is a new company and is going to be run as a monopoly. This will affect stakeholders in many ways. Government is going to be very much affected by this change in the functioning of the company, because the potato chips company, being the only one in the country would raise the prices of the chips thereby decreasing the income which in turn will reduce the level of expenditure as well as investment. At one side, a new company will benefit a few suppliers with its high volume while others would be at a loss. The increase in the prices with a decrease in the quantity would adversely affect the consumers (Krugman and Obstfeld, 2008).
Furthermore, we can also suppose that a monopoly generally reduces the development and advancement in the potato chip industry and enhances the prices for the customers. A monopolistic environment creates such circumstances that the need to contend whether with regard to competitive benefits, pricing or servicing ceases to exist. It is probable that it will adversely impact the customers. On the other hand, monopolies play a vital role in steadying the situation of the potato chip market. This will present a favourable situation for the interested parties who although will not be seeing any rising profits but will observe stable profits. Here, the government plays the role of a wildcard which may follow an anti-trust case against the market to officially disintegrate the business (Krugman and Obstfeld, 2008).
2. Given the transition from a monopolistically competitive firm to a monopoly, what will be the changes with regard to prices and output in both of these market structures?
Some of the significant differences for the potato chip industry are given below:
Price and marginal revenue: the price is equal to the marginal revenue in a perfectly competitive market whereas in a monopolistic market, price is always kept higher than the marginal price (Krugman and Obstfeld, 2008).
Product differentiation: A perfectly competitive market does not have a product differentiation. Each commodity is perfectly the same and is an absolute substitute for any product. A monopolistic market has such a wide range of product differentiation that a monopolized product has no substitute present. That particular product is supplied by the monopolist only. A consumer either has to buy the product from the monopolist or do without the product (Krugman and Obstfeld, 2008).
Elasticity of Demand: The variation in terms of percentage in the demand as a result of the variation of one percent in the relative price is called the elasticity of demand. There would be a comparatively inelastic demand curve for a prosperous monopoly. Hurdles to enter a market are denoted by the low coefficient of elasticity. For a perfectly competitive demand curve, the coefficient of elasticity is infinite (Krugman and Obstfeld, 2008).
Surplus Profits: If profit is greater than the usual anticipated return on investment then such profits are called positive or excess profit. In the short-term, excess profits can be obtained but this can draw the competitors who by freely entering into the market can lower the prices and this would result in decreasing excess profits to nil. In such a case monopoly is better as it can restrict the entry of the competitors and thus can restrict the excess profit (Krugman and Obstfeld, 2008).
Profit Maximization: A monopolistic firm operates in such a manner that its price is same as the marginal cost thereby maximising the profits. The profits are capitalized upon by making a product in such a way that marginal cost and the marginal revenue is the same. A monopolistic company has a perfectly elastic i.e. A flat curve. The directions are not comparable. Price line, demand and average revenue curve are all identical. Marginal revenue curve is constant because the average revenue curve is also constant. Marginal revenue curve is equal to the demand curve, while the average price remains the same. Demand curve and price line are also identical to each other (Krugman and Obstfeld, 2008).
Supply Curve: One to one relationship between quantity supplied and the price does exist in a competitive market. A monopolistic market fails to trace a curve for short-term supply, because there is no unique quantity supplied for a stated price. No supply relationship exists in a monopolistic market. It was noted by a number of researchers that a modification in demand does bring about a change in the prices but the output remains the same, while in a few cases the output may change while the price remains the same. Monopoly is produced when marginal cost and revenue get on an equal footing. For a demand curve, the supply curve is formed with a combination of price and quantity at a point where marginal cost and revenue equals each other. A supply point is going to be formed with a new equilibrium, which is achieved with the shifting of the demand curve which in turn shifts the marginal curve as well. In no conventional sense, the locus of these points is going to be a supply curve (Krugman and Obstfeld, 2008).
In monopoly, a direct relationship exists between production and the profit and that is why the prices shoot up. The amount of labour and the price of the chips are directly linked to the…