Monopolistic Competition versus Monopoly


Introduction

Wonk, a company in the Northwest, has bought up constituents of the potato chip market and has conglomerated them into one unit. The group of companies prior to the merger was individual competitors in a market dealing with the same products. However, after being bought by two lawyers, the environment is bound to change as the competitive market changes in structure. The preceding scenario is an example of an imperfect competitive market referred to as monopolistic competition. Monopolistic competition is comprised of a group of producers with identical products. The competition between the producers is not determined by the prices of the goods they supply but rather by how differentiated their products are (Salvatore, 2006, p.238). In this kind of competition the producers that are involved take the price that the rival producer is charging and use it on his own product not considering the consequences of the price.

The scenario is different in a monopoly. Here, a single firm is the sole supplier of a given product as is the case when Wonks bought up the individual competitors and joined them to make up a single firm. The main characteristic of a monopoly is that the producer has a higher market share than that which is expected within a perfect competition. Another characteristic of the monopoly set up is the lack of substitute products in the market denying the consumers a choice.

In this paper, we are going to analyze the consequences of a monopolistic competition being transformed into a monopoly. The hypothesis developed is; analyzing the effect that transforming a group of companies in a monopolistic competition into a monopoly will have on consumers, government and the company.

 Discussion

In order to better understand the transformation, a closer look at the characteristics of both a monopolistic competition and a monopoly is required. In so doing, one can then draw parallels and differences that arise. In a monopolistically competitive market, a firm acts as a monopoly does in the short run, however in the long run, the market resembles a perfect competition since there is entry by more competitors and the gains accrued by having highly differentiated products diminish as does the possibility of the producers gaining economic profits. Consumers are very aware about the qualities of the products that the rivals offer since the differences are not evidenced by price. This model therefore is characterized by well informed customers and the producers rely on brand uniqueness to trigger a brand loyalty in consumers. In this model, there is no barrier to entry or exit. The model can thus be attractive to a large number of producers with identical products as there are no rules against entry. Likewise, there are no rules that may hinder a producer exiting the market when it is no longer attractive. Lastly, producers exercise a certain degree of control over the prices they charge. Although the control they have is limited, a producer can decide to price his products differently from the market price.

The government can usually intervene in a monopoly in order to accomplish a determined goal or simply to cushion the consumers against extortion. Otherwise, when a monopoly is not coerced to perform in a certain way, the most typical goal is to maximize profits. The producer accomplishes this by producing few goods and charging them at a high price. The producer is thus a price maker in contrast to one in a monopolistic competition Monopolies often have barriers to entry where other sellers find it extremely hard to enter the market (Burkett, 2006, p. 155). This may be due to the structure adopted by the monopoly that discourages competition or may be sanctioned by the government. The major characteristic of a monopoly, however, is the fact that only a single producer is present in the given market. Here, it is assumed that the single company involved in the market is the industry. In a less elastic market, the producer can sell fewer quantities and charge them at a higher price or he can produce many quantities and sell them in a lower price in a highly elastic market setting. This is referred to as price discrimination and is set at the will of the producer (Maurya, 2008, p.158).

While the companies contained in Wonks operated as single entities, they were relatively inefficient. This is always the case that the benefits that are realized from the regulation of prices of individual products in such a market scenario are less than the costs incurred. The solution would have been for the government to regulate all the firms which is impossible in a market based economy. The inefficiency was further illustrated by the fact that the average total cost of productions for all the firms could not have been at a minimum. Furthermore, the marginal costs were less than the price of the products in the long run.

The monopolistic competition laid the ground work for the establishment of brand names usually achieved by rigorous advertising. Misinformation about a product in an advertisement could lead consumers to purchase a product rather than for the reason that the product is superior to the others in the same market. The benefits of consuming a product purchased under the monopolistic competition scenario can often be less than the initial input in choosing the product from a vast number of identical products with different brand names. Wonk as a conglomerate is bound to reduce the many brand names in the market produced by the formerly many players in the potato chip industry. This presents the consumer with only a limited number of products or even a single one to choose from. This may be beneficial to the consumer since there is minimal energy expended in trying to choose a product the end result of which might be a satisfied consumer.

For Wonks the best approach would be to operate as a single business entity resembling a monopoly. This is best because in a monopoly, it is easier to minimize cost and maximize on profits. As a monopolistic competition, the firm only breaks even when the marginal cost is equal to the marginal revenue (Depken, 2005, p.198) however in a monopoly, the marginal revenue is less than the price. The monopolistic competition further presents a consumer with a vast list of highly differentiated products that are substitutes to each other. In contrast, a monopoly has absolute product differentiation and the consumer either buys the product on the producer’s terms or goes without the product. All these factors are aimed at illustrating that the best way forward for Wonks would be to operate as a monopoly as the gains to be accrued from a monopoly perspective far outweigh those to be accrued in a monopolistic competition.

From a consumer perspective, maximum benefits can only be accrued when the constituent companies in Wonks operate as individual entities in the market. This is because in a monopolistic competition, the price is always set to an optimum and the only variable is the choice of the product the consumer opts for. However, in the case of a monopoly, the consumer does not have a choice of products to buy as there exists only one supplier in the market and no substitutes are available. In extreme monopolies, aimed and making huge profits, the consumer may be exorbitantly charged for substandard products in the market. The consumer may also be subject to receive small quantities of a product in the market for a higher price than would be the case in a perfect competition. Ultimately, if Wonks was to operate as a monopoly the government would intervene in order to put regulations that will shelter customers from monopoly tendencies that border on fleecing them.

The government has laws against monopolies that conduct themselves in a way that discourages competition. The laws are applied by many governments worldwide and mostly regulate the activities of monopolies be they natural or government-granted.  The government would collect more revenue by taxing individual entities that have joined up to form Wonks. Government intervention would be required if Wonks was to operate as a monopoly. There is therefore more that the government gains by the entities being managed as single business units rather than when they are conglomerated into a single company.

Conclusion

In the discussion above, there are highlights that emerge. Monopolistic competition is characterized by many producers not fixated on price but rather on the products, attempting to differentiate them from those sold by their rivals. Companies that participate in this kind of market use most of their resources crafting their products so that they are unique and appealing to the consumers. In this endeavor, advertising is fundamental in informing the consumers of the unique qualities their products possess over those of their competitors.

In a monopoly, however, the producer does not face any competition and focuses on maximizing profits. This means that the producer can quote the price he feels like as well as the quantity he produces. In both of the above scenarios analyzed with the consumers, the government and the firm in mind, and attempting to prove the hypothesis; analyzing the effect that transforming a group of companies in a monopolistic competition into a monopoly will have on consumers, government and the company, some deductions can be made. First, Wonks benefits more when it structures itself as a monopoly as compared to having different outlets with individually differentiated products as in a monopolistic competition. Second, the consumers will benefit more in terms of having a wider range of products at a competitive price when the company is run with multiple business units. Lastly, the government could gain if either of scenarios was in effect but has a responsibility towards protecting consumers against monopoly tendencies that charge high prices for small quantities of products and thus would rather the companies be run individually and continue to exist under the monopolistic competition.

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