Monopoly vs Monopolistic Competition Essay

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Monopoly versus Monopolistic Competition

ECO204 Principles of Microeconomics

01/09/2012

In the scenario provided, firms in the potato chip industry were competing in a monopolistically competitive market structure and were earning normal rate of return in 2007.   In 2008, two lawyers bought these firms and combined them to create a monopoly called “Wonks”.   In this paper, I will discuss the difference between monopolistic competition and monopoly; its advantages and disadvantages; how it affect its stakeholders, pricing, output, demand, and which is more beneficial the company to operate in.   Understanding the two different market structures will help us assess which will be more beneficial for Wonks to operate in.  
Let’s start with a quick overview of what a market is and its classifications.   A market is the institution where buyers and sellers get together to trade goods and services.   It is classified on the basis of place, time, and type of competition.   Place is classified into local markets, national markets, and international markets.   Time is classified into short and long period market.   Competition is classified into perfect and imperfect competition.   In a perfect competition, firms are small and produce practically the same products so there is no consumer preference.   No firm is large enough to have control over prices, and new competitors can come and go as they please.   It also requires a large number of buyers and sellers, identical goods, and perfect information is possessed by both parties about the selling and buying opportunities available.   Imperfect competition on the other hand, is an industry where single firms have some control over price and competition.   Allocation of resources under the imperfection competition is inefficient. Also, they have the ability to raise prices without losing the demand for their products, hence...

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