ECO 204 Week 5 Final Paper,Principles of Microeconomics
ECO 204 Week 5 Final Paper,Principles of Microeconomics
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Date Created: 11/07/15
Final Paper 1 Final Paper Name. ECO204: Principles of Microeconomics Professor date Final Paper 2 Final Paper In 2008, two lawyers began purchasing competitive potato chip firms with the goal to form a monopoly firm called “Wonks”. After purchase of these firms, the two lawyers then hired a management consulting firm to estimate the longrun competitive equilibrium of this new monopoly. The following paper will discuss the benefits of this new monopoly towards stakeholders involved, the changes that may occur in price and output of the product in this particular market structure; and market structure that will most benefit the Wonks potato chip monopoly. A monopoly is defined as a 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. By purchasing all firms involved with the potato chip industry the two lawyers created a pure monopoly. A pure monopoly would allow the two firm owners to control the whole industry. By seizing control of the market, the firm would now control their position on the market demand curve. They control everything from output quantity, to price point and their only limit to production would be cost of production. When a firm controls there position on the demand curve, the firm has over all power as to what and how much product is produced. By operating as a monopoly there Final Paper 3 is no difference between the industry and the firm, as stated in our text. The firm is now the industry, so all decisions are ultimately decided by the firm. The result of this can be price discrimination which will impact household and suppliers of the product. Different suppliers may be charged a higher fee for the same product, which in turn, will ultimately affect the consumer. Different household may pay more for the exact same product if they are purchasing it from a different area of the country or a different city where the manufacturer has negotiated a lower rate. The pricing and impact burden ultimately fall on the consumer at the end of the purchasing chain. To deal with a monopolistic firm is not usually the most beneficial from a consumer and business owner standpoint. Monopolies have the power to control price point which can affect the business/supplier and ultimately the consumer. By the two lawyers owning the Wonk monopoly, business owners are forced to only have one choice of manufacture to purchase potato chip products from. This can impact the business owners selling price if the original manufacturer is now increasing their price point based on the simple fact that they control and own all market shares. This control of the market will affect the buyers price and ultimately the consumers purchase. By raising or lowering prices in the market the manufacturer can change and alter the demand and total quantity of product produced. Final Paper 4 The manufacture, Wonk potato chips would more then likely benefit by operating as a monopoly. As a monopoly, Wonk can now determine how much product they release to the market. By controlling production and amount of product to be received by the consumer, they can impact the selling price. Since Wonk would not be in competition with any other manufactures they could increase their price as high as possible as long as the original cost of production is covered. They would not have to compete with competitors pricing, so ultimately they would only reap the benefits of profit once all price points are determined. Wonk could be affected in a negative way if price points are set to high. Ultimately by operating as a monopoly Wonk has the control to set pricing. This decision as to where to set pricing can ultimately impact the demand curve. By setting price to high, the consumer may not see value in purchasing the product from the manufacturer. This can create a negative impact on market demand resulting in a loss of revenue. By setting price point to low, the manufacturer may need to sell much more product to compensate for production costs. When dealing with monopolies in other fields besides food products, I realize that there may be no limit as to how high price point can be set. But for this particular industry, in my opinion I cannot see the manufacture increasing price point in a drastic way that will result in consumers boycotting the potato chip industry. I believe the manufacturer would more than likely increase price in minimal fashion to still provide a consumer demand so product sales. Final Paper 5 As a monopoly the most beneficial market structure for Wonks to operate under would be an imperfect competition market. By being the sole contributor of product to this market, Wonks would control the potato chip market in whole. An imperfect competition market allows the monopoly to exist because it does not meet the conditions of a perfect competition market. A perfect competition market would have many firms selling competitive products, and no one firm would be large enough to set the price on a product. Because Wonks has purchased all relevant potato chip competition, they control the market and would not qualify for a perfect competition market. As a monopoly owner this would be a large benefit from a profit standpoint, but as a consumer this would not be a beneficial market to purchase goods from. Ideally as a consumer, I believe one would want to participate and purchase goods from a monopolistic competition market or competitive market. By participating in a competitive market the buyer can choose to purchase products from many varies firms. The advantage to the consumer would be different choices of similar products and more than likely lower price points. In a monopolistic market the producer shares many small parts of the market with the other market competitors which can keep price points on a level playing field with the other firms in the same market. I believe by having many choices at a level price point would ultimately have an advantage to the consumer. By operating as a monopoly, Wonks may be subject to legislation based on the rules of The Sherman Act of 1890. The Sherman Act states that it is illegal for a person Final Paper 6 or persons to monopolize or attempt to monopolize. Two government offices play a major role in preventing businesses to turn into monopolies. These offices are the Federal Trade Commission and Antitrust Division of the Justice Department. Some of the main reasons that government tries to prevent monopolies from forming seems to be that by operating as a monopoly the business has ultimate power of the market for their product. As a result of this power and majority stake the government has documented case of price discrimination and unfair trade practice. The Sherman Act, along with the Clayton Act helped the Federal Trade Commission pass laws that made tying contracts illegal, it limited mergers that would create monopolies and lastly it banned price discrimination. By enforcing these acts and laws the Federal Government has been able to keep a firm hold on monopolies, by preventing them in some instances before they ever occur. In other cases these acts have helped to breakup previously formed monopolies that held control of the market shares. By operating as a monopoly Wonk is creating a market that cannot be interfered with by potential competitors. By holding the majority stake, any other competitor will need to meet and match price point and quality of Wonks potato chips. From a consumer standpoint, I like to have a variety of options of products and ultimately like to be the one making the final decision on what I want to purchase. I do not want to be influenced by a firm that controls all products and all pricing that I must be charged. It is clear to me why different government agencies have also put a negative stamp on monopolies that are Final Paper 7 trying to form and encouraged the breakup of already existing monopolies. From the information provided we can see that by Wonks operating as a monopoly its benefits the firm only and is not operating for the benefit of the consumer.
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