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ECO204: Principles of Microeconomics

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The foresight that the two lawyers had in purchasing all of the firms competing in the potato chip industry is amazing. Having the understanding of how this could affect the market, and acting on these puts the lawyers in a league of their own. That being said, far more than just the intelligence level of the lawyers should be assessed when reviewing the potential highs and lows of the change in market structure. The change from several monopolistically competitive firms to one monopoly in an industry can hold several consequences for the stakeholders. Key factors which affect the consumer, such as output and price, can be changed with no concern over competitors capitalizing on opportunities offered. In order to determine the effects of the change in market structure, a review of the positive and negative effects for stakeholders, as well as the overall positives and negatives of the change must be conducted. To understand the effects of a monopoly, we must first understand what a monopoly is, and how they work. A monopoly is a single firm in an industry that produces a product with no close alternatives and has significant barriers to entry into the market (Case, K.E., 2009). Monopolies usually operate in industries where there are either natural barriers to entry, or legal barriers to entry. These firms gain market power from the fact that there are no close substitutes and there are barriers to entry for potential competitors. This leads to monopolies being able to set the price for their goods, because they are the only firm producing them (Western Kentucky University, N.D.). Now that we know what a monopoly is, it is easier to understand how combining several monopolistically competitive companies into one firm acting as a monopoly will affect changes on the stakeholders in the market. First and foremost, the consumer is

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likely to see the biggest changes in supply and cost. Purchasing from a monopoly who wishes to maximize profits will potentially cause the supply and the price to change. As our text states, a profit maximizing monopoly will adjust their production to be at the most optimal combination of price and output. By setting their price and output level to the optimal position, the monopoly can ensure that they earn the highest marginal revenue on each unit of production, thus maximizing their profits. In the case of a monopoly, they are price makers, which means that they can set their price to a position where they can profit. This price is set in an area where the market will bear it, or the monopoly could not exist, as consumers would not buy the product. Further negative impacts to the consumer are possible, such as poor or stagnant product offerings (Petroff, 1982). In the same token, the consumer could potentially see advantages to the monopoly. These could include newer better products through research and development, and lower prices through increased efficiency. While these are possible consumer advantages to a monopoly, they are less likely than the disadvantages because the monopoly has no competition to drive the need to be efficient or develop newer, better products (Western Kentucky University, N.D.). On the other end of the spectrum, you have the effects on government. The government may see a benefit from only having to regulate one company, as opposed to many. In the case of Standard Oil, the government saw the monopoly build expensive infrastructure which proved beneficial to the economy and nation as a whole. As the infrastructure built by Standard Oil allowed for more efficient transportation and thus a lower cost to the consumer. Other such benefits arose from the creation of the AT&T

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monopoly. AT&T undertook the expense of building the communication infrastructure which has assisted in the expansion of the economy in the United States (Investopedia, November 21, 2010). As is the case with the government benefits from a monopoly, businesses are likely to see similar benefits. The infrastructure created from AT&T allowed businesses a new way to communicate with their customers. The burden of the expense of this infrastructure was born by a monopoly (Investopedia, November 21, 2010). Had this monopoly not existed, it is possible that the communication infrastructure would have taken decades longer to be built. A good example of a current day business benefit from a monopoly would be Facebook. While some may not consider Facebook a monopoly, there are certainly no other competitive games in town. Facebook allows businesses to communicate with their customers in an efficient manner. Businesses have definitely benefited from the advances of monopolies. When a group of smaller firms operating in a monopolistically competitive market are working against one another to increase their revenue, they are benefiting the consumer. These firms are constantly trying to set themselves apart from the other firms in the market with their products and pricing. As our text states, monopolistically competitive market has many firms with differentiated products in which price is a limited decision variable and entry is relatively easy. In a monopolistically competitive market, brands are distinguished by their price and quality. These firms differ only in the fact that they are not able to set the market price with their size; they set their own prices based on their products. The goal in a monopolistically competitive market is to

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differentiate yourself through the quality of your brand. When this is done, the monopolistically competitive firm gains a foothold in the market (Case, K.E., 2009). That being said, the transition from a monopolistically competitive market to a monopoly is not a drastic change in thinking. The main difference is that the decision making power transfers from several small firms to one large firm. Along with that change may come several other changes. The monopoly no longer has to concern itself with product differentiation. Therefore, there is less need for things such as advertising the differences between two varieties of the same good. A monopoly will sell the goods to the market regardless of the differences between two varieties in their product portfolio. This is because the monopoly has no competition. In this case, the monopoly may choose to spend those funds normally reserved for advertising on lobbying governments to create legal barriers to entry into the market (Case, K.E., 2009). In the case of a monopolistically competitive market changing to a monopoly, there would be changes in the price and output of goods as well. The need to differentiate the products which are close substitutes no longer exists, as the close substitute is now a part of the product portfolio within the monopoly. This could potentially lead to the monopoly reducing or eliminating the output of some of the close substitutes in the market. This could create an opportunity for the monopoly to increase the price of the other offerings in their portfolio. Generally speaking, the monopoly will set the price and output to a position in which it maximizes profits, while not pushing their prices to a position that the market cannot bear (Case, K.E., 2009). When reviewing the most beneficial market for the aforementioned potato chip monopoly to operate in, it is important to remember that the lawyers decided to purchase

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all of the smaller firms for a reason. From the information available, it appears that the reason would have been to set price and output to a point where profits could be maximized. This would mean that the most beneficial market would be that of a monopoly. The firm can then set their price and output to a point where their profits are maximized. This would mean that they are producing product at an output which keeps their marginal cost below their marginal revenue, thus maximizing their profits. This may not be the best market for the consumer, as they have limited ability to decide between competitive brands. This will ultimately limit their choices and increase the prices they are paying for the goods. In conclusion, the change from a monopolistically competitive market to that of a monopoly has potential benefits for the stakeholders involved. However, there are definite drawbacks to having a single firm responsible for the output of the entire industry. In many cases, the consumer will lose out in this type of environment.

7 References

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Case, K.E., Fair, R.C., Oster, S.M. (2009) Principles of macroeconomics. (9th ed.), Upper Saddle River, NJ: Pearson Prentice Hall Investopedia, (November 21, 2010), A history of u.s. Monopolies. Retrieved September 11, 2012 from http://www.investopedia.com/articles /economics/08/hammer-antitrust.asp#axzz26lu0mRrB Petroff, J., (2002), Pure monopoly. Retrieved September 11, 2012 from http://www.peoi.org/Courses/Coursesen/mic/fram5.html Stigler, G.J. (May 1982), The economist and the problem of monopoly, Retrieved September 12, 2012 from http://www.jstor.org/stable/1802294?seq=1 Western Kentucky University, (N.D.), Chapter 12: pure monopoly. Retrieved September 14, 2012 from http://people.wku.edu/dennis.wilson /micro/lecture10.doc