Monopolistically Competitive vs. Monopolies Essay

1035 WordsNov 14, 20125 Pages
Monopolistically Competitive vs. Monopolies May 27, 2011 Wonks is a newly developed company ran by two lawyers that bought up all the potato chip firms in the Northwest. The potato chip industry was monopolistically competitive and now it is ran as a monopoly. This paper will explain the deference’s between monopolistically competitive and a monopoly. It will also discuss the changes within the industry after switching to a monopoly and the benefits, if any, of the potato chip industry being ran as a monopoly. A monopoly can be considered the opposite of perfect competition. It is a market form in which there is only one seller. The definition of a monopoly is an industry composed of only one firm that produces a product for which there are no close substitutes and in which significant barriers exist to prevent new firms from entering the industry (Case, Fair & Oster, p. 254). By the lawyers buying up all the potato chip firms in the region they have eliminated the competition. Wonks is not restrained by the government and will do everything possible to block entry of new companies into the industry to preserve economic profits in the long run (Case, Fair & Oster, p. 254). This limits consumer’s choices in brands and pricing. Smaller potato chip businesses would not be able to compete and will eventually be forced to shut down. A monopolistic firm maximizes its profits by producing up to the point where marginal revenue equals marginal cost. As the monopolist, Wonks is the price maker and can increase the amount of sales by lowering the price, Wonks will not need to lure consumers away from rivals; rather Wonks encourage them to buy more. Nevertheless, at any output level, the price charged by a monopolist is higher than the marginal revenue. As a result, a monopolist also does not produce to the point where

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