The potato chip industry in the Northwest in 2007 was competitively structured and in long-run competitive equilibrium; firms were earning a normal rate of return and were competing in a monopolistically competitive market structure. In 2008, two smart lawyers quietly bought up all the firms and began operations as a monopoly called “Wonks.” To operate efficiently, Wonks hired a management consulting firm, which estimated a different long-run competitive equilibrium. This paper will cover the benefits of this new monopoly, the changes which will occur in price and output of the product in this particular type of market structure; and market structure that will most benefit the Wonks potato chip company.
A monopoly is defined as a company that dominates and controls a specific industry. Moreover it is a market condition in which a single seller controls the entire output of a particular good or service. A firm is a monopoly if it is the sole seller of its product and if its product has no close substitutes. Close substitutes are those goods that could closely take the place of a particular good. A monopoly is also where the entry of new producers is prevented or highly restricted (Business Dictionary, 2012). An example of this would be Microsoft and Windows.
Monopolies come about for many reasons such as the government gives a firm the exclusive right to sell a particular good or service, a key resource is owned by the firm, or The costs of production make one producer more efficient than many, due to increasing returns to scale–“natural monopoly.” A natural monopoly is when a single firm can supply a good or service to an entire market at a lesser cost than could two or more firms.
Monopolistic competition is a market structure characterized by a large number of relatively small firms. While the goods produced by the firms in the industry are similar, slight...