Principles of Microeconomics (BAK1144A)
[ July 16, 2012 ]
Chipping into a Monopoly
The structure of the market in any industry is important. Which market structure is the best is dependent on whether you are the consumer or the provider of the goods or services. In a monopolistically competitive market place there are many firms providing homogenous products meaning there are similar substitutes available which also means the demand curve is more elastic. The economic efficiency and barriers to entry for all practical purposes don’t exist. A normal rate of return in a long run competitive equilibrium results in sufficient earnings to keep owners and investors adequately satisfied (Case, Fair & Oster, 2009, pg. 137). In a monopolistic economic environment you have one firm that controls the entire market place. The barrier to entry is high and profit maximization is usually high. In the potato chip industry in the Northwest, moving from a monopolistically competitive market place to a monopoly has different ramifications for the potato chip manufacturer and the various stakeholders. Prior to the purchase of all of the potato chip manufacturers by two lawyers, the potato chip industry in the Northwest was operating in a long run competitive equilibrium earning a normal rate of return. In this environment consumers were able to make decisions based on price, quality or response to sales availability and convenience and the potato chip manufacturers were satisfied owners and investors by earning a normal rate of return. This is a very good economic condition for consumers and a decent position for the potato chip manufacturers. Any change in price by the manufacturer either up or down will result in a response from the consumers. In a competitive environment, firms are price takers, or in other words, no one firm is large enough to increase prices and have others follow suit. An increase in...