The Potato Chip Industry - Term Paper Example

The Potato Chip Industry Introduction In economics, monopoly is widely defined as a market structure where there exists only a single seller producing a commodity with no other close substitutes. This single seller can either be an individual owner or a partnership company or even a joint stock company. This single seller in the market is known as the monopolist who is known to be the price maker enjoying complete control over the process of supplying commodities to the market (Armentano, 1978). The case which is being concentrated in this research paper is of the potato chips company called ‘Wonks’ which was started by two smart lawyers who secretly bought up all the firms of this sector and began their operations as a monopolistic firm. The intention of this paper is to gain an in depth understanding of the monopoly market structure in comparison to the monopolistically competitive market structure with reference to potato chip industry. Benefits of Monopoly to the Stakeholders A monopoly market structure is characterized by meager or insignificant competition and complete control of the monopolist over the market. It is often learnt to be extremely profitable to the shareholders who intends to invest in a monopolistic business. It is because of the fact that the shareholders have to face insignificant risks of suffering loss from the business as the monopoly firm enjoys an apparent influence over the price of the commodities which can be altered at any time to substantiate the probable risks, thus securing the shareholders’ value. Moreover, a monopolistic firm also enjoys minimum exposure to the risk of close substitutes, since there are no other firms associated with supplying the same product. In case of a monopoly market, since there is only a single firm in market selling a particular commodity, it also becomes easier for the government to regulate the market operations (Petru, 2011). A monopoly firm is found to be consistently innovative in the long run for the reason that if the firm does not encourage innovation in its products and/or services, the consumers may opt for a substitute of the product instead of the same monotonous commodity which in turn is most likely to reward better market opportunities to the new entrants. In other words, it can be affirmed that if a monopoly firm continues with a same product without innovation, as a result of the growing consumer demand for new products, new entrants are most likely to get an opportunity to invade the market. Thus, it is quite likely that a monopoly market structure will be able to reward better customer services with enhanced variety and quality in its products and/or services (Petru, 2011). A monopoly firm generally maintains a long run relationship with its trader of required raw materials. The raw material suppliers and other business houses which are involved with a monopoly firm and largely depend upon it are relieved from the risk of suffering a loss as a consequence of the risks witnessed by the monopolistic firm. Monopoly market structure also facilitates in healthy competition among the raw material suppliers and other stakeholders involved in the business for the reason that they have only a single firm to satisfy and as a result come up with several new ideas and innovations (Petru, 2011). Alterations required for monopolistically competitive firm to change as a monopoly Monopolistically competitive market is a market structure, where there are many competitors, each selling slightly diverse product from that of the competitors. In case of a monopolistically competitive market, the market players need to posses wide spread knowledge about the market and competitors in the market. Each firm can decide its own the price and output; however, the decision depends largely upon the market conditions. A monopolistically competitive market is characterized by a huge number of small firms each enjoying a relative freedom of entry and exit in the industry. It is worth mentioning in this context that in case of a monopolistically competitive market structure, the actions of any of the competitors in the market can affect the actions of others (Tucker, 2010). One of the main characteristics of a monopolistically competitive market structure is product differentiation. Unlike a monopoly market, the commodities rendered through a monopolistic competitive market tend to be dissimilar from the other substitutes in various ways such as physical differences (Holcombe, 2009). Apart from the physical differences, another significant dissimilarity between a monopoly market and a monopolistic market structure can be regarded as the perceived difference. In many of the cases, a particular product of a firm may be identical physically and also on the basis of quality with that of a competitor. Even though, the product is often regarded to be different according to the perception of the consumers. Such kinds of differentiations are generally created by brand names, where a particular brand is more renowned from the other. Support services also serve as a media for product differentiation (Holcombe, 2009). In a monopolistically competitive market structure, a firm cannot decide the price of the products but has only some influence over the price unlike the monopoly firm where the company enjoys almost a complete control over the commodity price. In other words, unlike monopolistically competitive market structure, a monopoly firm can decide its own price rather than accepting the price decided by the market. The nonexistence of competition in the market relieves the monopolist from price pressures. However, the firm needs to regulate the price of the commodities in order to restrict the entrance of new firms in the market. A monopolist also enjoys the privilege to charge dissimilar prices from different customers. This kind of pricing policy is known as price discrimination. The policy of price discrimination can be adopted on various bases such as charging different amounts from different consumers or by fixing different rates for different places. The output of the monopolizing firm is generally high for the reason that it is able to satisfy the demand of all the consumers without any competitors interfering in the operations of the firm (Tucker, 2010). Hence, a firm intending to emerge as a monopoly should be consistently focused on innovation of the product facilitating in customer satisfaction and obstructing the new entrants as well. A monopoly firm can decide the price of the products and is considered to be the price maker, but a monopoly firm like Wonks should regulate the product rates in such a manner that it becomes extremely difficult for other firms to occupy the market which will in turn cause a monopoly. To be precise, a firm which intends to alter itself from a monopolistically competitive firm to a monopoly firm should develop aggressive competitive strategies inhibiting the number of strong competitors existing within the market structure and barricading the entrance of new players. Beneficial market structure for Wonks to operate in and the benefits to the consumers It can be beneficial for a firm to operate in a monopoly market as the company shall attain the advantage of insignificant competition within the business environment sharing minimum or no proportion of the entire market share. Being a single seller, a monopolizing firm will enjoy complete control over the output of commodity and also over its price. Due to insignificant competition, a lack of innovativeness can also be seen in a monopolizing firm which in the long run may have an adverse affect on its overall market value (Petru, 2011). Since there are no close substitutes of that commodity, a lack of consumer choice persists within the market structure due to which the consumers are quite likely to have huge switching costs de-motivating them to actively participate in the product delivery process. It can also be affirmed that Wonks will earn abnormal profits in the long run for the reason that there is no fear of interference of a competitive seller in a monopoly market (Tucker, 2010). In a monopolistically competitive market, as a result of the competitive market environment, the competing firms intend to bring about certain innovations in the products and/or services to satisfy the consumer demand which facilitates in product development in terms of variety as well as quality. In case of a monopolistically competitive market, the consumers also enjoy a certain extent of bargaining power which is not possible in a monopoly market (Dobson & Et. Al., 2000). Therefore, it can be stated that it is likely to be more profitable for Wonks to operate in a monopolistically competitive market rather than a monopoly market. Conclusion and recommendations From the above discussion, it can be concluded in case of a monopoly market, the monopolist enjoys complete control over the market price. Additionally, the monopolist has the power to decide the price and output of the market according to his convenience. Hence, Wonks can expect a long run profit if it carries on its business in a monopoly market. Wonks being a monopolizing firm, the stakeholders involved with Wonks are likely to be significantly relieved from the threat of suffering a loss for the reason that Wonks can increase the price at any time to compensate the losses of the stakeholders. However, from the consumers’ perception, a monopolistically competitive market structure is always profitable for them rather than a monopoly market structure. In a monopolistically competitive market, the consumers get to choose from a variety of similar products and can bargain on the price of the commodity which is not possible in a monopoly market. It has been also noticed that the price of the commodities are comparatively lower in a monopolistically competitive market than a monopoly market which also proves to be profitable for the customers. Therefore, focusing on the competitive advantages and the consumer as well as interests of other stakeholders, the structure of a monopolistically competitive market shall be more favorable for Wonks in comparison to monopoly market. References Armentano, D. T. (1978). A Critique of Neoclassical and Austrian Monopoly Theory. New Directions in Austrian Economics, 94-110. Dobson, P. & Et. Al. (2000). Buyer Power and Its Impact on Competition in the Food Retail Distribution Sector of the European Union. The Institut dEconomie Industrielle. Holcombe, R. G. (2009). Product Differentiation and Economic Progress. The Quarterly Journal of Austrian Economics 12(1): 17–35. Petru, C. (2011). Monopoly: advantages and disadvantages. Alexandru Ioan Cuza University. Tucker, I. B. (2010). Survey of Economics. United States: Cengage Learning. Read More