Principles of Microeconomics
I January 29, 2012
The potato chip industry in the northwest was running in competitive equilibrium in 2007. In 2008 two lawyers quietly bought all of the firms and created a monopolistic company called "Wonks". The two lawyers then hired consulting firm to estimate the different long term equilibrium. This paper will address the benefits that a monopoly has over a monopolistic competitive company.
A monopoly is a business that produces a product that there are no close replacements and in which there are significant obstacles for new firms to enter the market [ (Case, Fair, & Oster, 2009) ]. Potato chips are a unique snack while there are replacements none are really the same. As for obstacles to new firms attempting to enter the market this would require a large capital investment that would be very risky. "Wonks" could increase production and reduce prices making it hard in not impossible for the new company to get a return equal to the market rate. When the two partners bought up all of the competing businesses they created a monopoly. By creating a monopoly the two partners are now in control of the industry. They now have complete control of supply and the price that is set for their product. The only limits they face are the price that the market is willing or able to pay and their cost of production.
When a company can operate as a monopoly there is no difference between the company and the industry [ (Case, Fair, & Oster, 2009) ]. When a company gains control of an entire industry all option are up to the company's discretion. The monopoly has complete control of supply, therefore it can control demand by distributing less of their product, this will in turn raise the price consumers are willing to pay for the product. This hurts consumers by decreasing the utility gained by each dollar spent.
The government has policies in place to protect consumers from...