Potato Chip Industry

Potato Chip Industry

Introduction

Aside from the competition in between the sellers, suppliers, and industries that can be found in both domestic and international markets, there are competition that can dominate the market structures. In between the extremes of pure competition and monopoly, there exist the “intermediate” market structures that can be classified into two categories: monopolistic competition and oligopoly. These two market structures often lumped together into a market characterized by “imperfect competition”.

In this paper, it seeks out the weighted answer that is based on the presented situation. In order to identify the necessary information, there are related questions that are concentrated in monopoly. The essay includes the discussion such as the benefit the stakeholders, government, businesses, and consumers, and as well as the different views in the monopolistic competition.

What is Monopoly?

Pure monopoly exists when a single firm is the sole producer of a product or services for which there are no close substitutes. When it comes in the idea of close substitutes, it means that there are no other firms that can produce the same products and thus varying only in minor ways from that of the monopolist. Monopoly is virtually nonexistent in basic manufacturing industries but was fairly common in steel, aluminum, tobacco, and other areas. Another monopolistic organization is the energy (electric power) plantation (Reynolds, 2005). However, it occurs that most commonly in regulated public utilities and in particular geographical areas where transport costs allow a local seller to act a monopolist within a certain range of prices. In addition, the firm under the monopolistic competition is considered as the industry and thus faces a negatively sloped industry demand curve for the commodity or service (Economides, 2003).

Benefits

Shareholders/Investors

Based on the given situation, it is said that there is an estimated of a long-run competitive equilibrium. It is true in the nature of the monopoly because the entrants in monopolistic industry are difficult and is often blocked. One of the barriers to entry is the size or economies of scale. Capitalization are surely great and is often includes the expensive proposition. However, if the business continuously growing and can stay in the market in the long-run, the return on investment is highly positive and might be turn into two-folds. In addition, the business can also block an entry from other competitors by the means of discovery, production, and control of the resources such as raw materials (Reynolds, 2005). A company that has a high control of strategic raw materials can use the full potential of the production. Another thing that can secure the long-run business competition is the patent ownership and research. Patents are held by the monopolist to prevent other firms from duplicating the product. In case of Potato Chip Industry, the ingredients might be the same with the other companies but the form or the shape of the chips or the logo of the package can be standardized and then patent. Aside from patents, the business can also enjoy the royalties and other income from franchising.

Government

The monopolistic competition also welcomes the market franchise that was awarded through the powers of the government. In franchising, the firm is granted to produce a given good or service in a particular area. In exchange for this, the firm allows the government to regulate certain aspects of its behaviors, pricing policies, and other operational policies. In addition, the government can also receive tariffs and might impose higher taxes since the firm is solely manipulating in the market. On the other hand, the use of subsidiaries (e.g. in consumption of a service) can be also imposed by the government as long the monopolistic firm agrees to it to prolong their operations (van den Bosch & de Man, 1994).  

Consumers

In terms of the welfare effects of pure monopoly, it is addressed that from the point of view of producers, a monopolistic market can be beneficial. A monopolist does not have to contend with any competitor, and therefore has considerable control over priced decisions, and has, therefore, more chances in maximizing profit. In addition, within the monopolistic competition, there is a restriction in the output, recognizable efficiency of the individual firms, and the range of products available because of product differentiation (Janssen & Moraga, 2000).

Prices in Monopolistic Competition

In some cases, a monopolist may find it possible and profitable to separate two markets and to charge different prices for the product in each of the markets. When the transition happened and the firm turned into monopoly there should be price discrimination. There are several reasons on why price discrimination occurs. First, the monopolist can keep the markets apart. Second, for price discrimination to be effective and profitable, the elasticities of demand at each price level must differ among the markets. In addition, under the monopolistic competition, the regulation of monopoly is quite obvious. There is a great tendency for a monopolist to maximize the profits and being only one in the market (Janssen & Moraga, 2000; Economides, 2003). Therefore, it will lead to the impression that monopolist do not normally care and think about the consumer’s welfare. If monopolies were not regulated, the cost of products or services can be much more expensive because of the tendency of the monopolist businesses to abuse their supremacy in the markets.

Public welfare dictates that the government should take a more active role in the regulation of monopolies. Monopolies cannot just be left alone by the government in the same way as other industries in the more competitive models are left alone (van den Bosch & de Man, 1994). There are two parties involved in the regulation – first is the monopolist that tends to maximize profit and the consumers who must be protected by the government and given a fair deal by the monopolist (Reynolds, 2005). Thus, the economic problem involved here is the determination of the rate that will induce the monopolist to furnish the quality and amount of product consistent with the costs and with the needs and demands of the consumers.  In the absence of price regulation, the monopolist would maximize the profit wherein the marginal cost equals marginal revenue. The government can regulate prices by establishing a price lower the scheduled monopolistic profit maximization, but of course, greater than the cost of production. Even if there is a regulation in the prices, the profitability is still achievable (McAfee & McMillan, 1996).

Beneficial Market Structure 

In reality, the firm that is under the Potato Chip Industry has close substitutes and many suppliers wherein the possibility to block the market entry is relatively low. The decision in making the business under the monopoly is possible but the risk is great. Also, if the prices are regulated or discriminated, the firm might experience the short-run profitability because of the losses that are associated in the kind of competition. Monopolistic competition invites the firms like power plantation, communication industries, and travel services (airports and airplanes) because of its unique characteristics. Because of these reasons, Wonks should consider to stay in monopolistic competition instead of being a monopoly (Economides, 2003).  

Under the monopolistic competition, the market organization has a relatively large number of small producers or suppliers that offers similar but not identical products (Lenard, 2000). In terms of the long-term equilibrium for the industry, the firm can minimize their possibility to loss and can still provide the benefits for the shareholders, government, and welfare of the consumers. There is also an efficient allocation of resources which makes the market more competitive because the firms are bound to implement their own strategies. Upon comparing with the pure competition where there are hundreds (or more) of producers, monopolistic competition can have at fairly large numbers (15-50) of producers (McAfee & McMillan, 1996). Because of the presence of the relatively large number of producers in monopolistic competition, the firm should only take strategies in terms of product differentiation. The product differentiation leads some consumers to prefer the products f one producer in an industry over those of others. Thus, there is some degree of control over prices leading to a negatively sloped demand curve. However, the existence of many close substitutes limits the degree of control resulting in highly elastic demand curve (van den Bosch, Volberda, & de Boer, 1999).   

Conclusion

Market competition has been always a good opportunity for the firms and industry to maximize their profits, which is definitely part of their objectives. However, it is important for the firms to understand and be oriented on which market structure they should consider to have more advantages. In addition, the organization should consider their own strengths such as the number of sellers and buyers of the commodity; the outputs of the firms in the market; and the mobility of resources as well as the freedom of entry into and exit from the industry.

References:

Economides, N., (2003) The Microsoft Antitrust Case: A Case Study For MBA Students, Accessed 27 June 2011, from http://www.stern.nyu.edu/networks/homeworks/Microsoft_Case.pdf

Janssen, M., & Moraga, J.L., (2000) "Pricing, Consumer Search and the Size of Internet Markets" Tinbergen Institute Discussion Paper TI 2000-042/1. Accessed 27 June 2011, from http://www2.tinbinst.nl/~moraga/searchsummary.pdf

Lenard, T.M., (2000), “Creating Competition in the Market for Operating Systems: A Structural Remedy for Microsoft,” mimeo. The Progress & Freedom Foundation.

McAfee, R.P., & McMillan, J., (1996) "Competition and Game Theory", Journal of Marketing Research 33(3), 263-8.

Reynolds, L.S., (2005) Basic Micro Economics: An Outline, Accessed 27 June 2011, from http://www.boisestate.edu/econ/lreynol/web/PDF/short_12_pure_comp.pdf

van den Bosch, F.A.J., & de Man, A.P., (1994) "Government’s Impact on the Business Environment and Strategic Management", Journal of General Management 19(3), 50-59.

van den Bosch, F.A.J., Volberda, H.W., & de Boer, M., (1999) "Coevolution of firm absorptive capacity and knowledge environment: organizational forms and combinative capabilities", Organization Science 10(5), 551-568.