Ashford ECO 204 WEEK 5 - Final Paper
This paper will throw light upon the various benefits and drawbacks associated with changing market structure of your business from a monopolistically competitive firm to a monopoly. It will not only look at the consequences for the firm itself but it will also discuss about the consequences upon the stakeholders involved like government, businesses and consumers. In the end it will tell us with which market structure Wonks will prosper with. Thesis statement of this paper will be “With transition from a monopolistically competitive firm to a monopoly, will it be beneficial for both the firm and stakeholders?”
First of all, if the company is run as a monopoly, there are many stakeholders involved which will be affected either positively or negatively with this transition. Monopoly involves single producer in the market, since all the firms competing in monopolistically competitive market structure are bought up and a monopoly has been formed, large number of consumers will have no choice and they will have to purchase from the Wonks regardless of the price. Previously consumers had choices and close substitutes were there for them and differentiated products were produced, however now they won’t be able to choose and their surplus will be reduced because monopoly is price setter and they charge higher prices and lower output. As a result of lack of competition in the market, inefficiency increases. Consumers may benefit from a monopoly only if monopoly engages and invests in innovation and invention which would lead to efficiency. However, at large monopoly is criticized and has a bad repute about exploiting its consumers. Monopoly has barriers to entry so other producers who wish to enter the market will not be able to enter the market so competition won’t exist. Government will have to regulate the monopoly in terms of setting price limits for the benefit of the society and consumers. Previously, government intervention would have been nominal but as a result of formation of monopoly, government will be active and serve for the interest of the society. Government may get involved reduce monopoly power, if consumers are being exploited and it may reduce barriers to entry so that other firms may enter the market and begin operations.
A monopoly is a market situation where there is only a single seller and there is large number of buyers. On the other hand, monopolistic competition is a market situation where there are large number of sellers and buyers. In this situation, consumers have close substitutes which means that products produced by different producers differ in size, color, price etc. however, in a monopoly, consumers have no close substitute of the product. Both are price setters and monopoly has barriers to entry where as monopolistic competition does not have barriers to entry. Under monopolistic competition, demand curve of the firm is relatively more elastic as compared to monopoly which has a relatively inelastic demand curve; this is because in monopolistic competition there is availability of close substitutes. This illustrates that with large number of producers, if a single firm raises its prices it means if a firm raises its price, it will lose its large market share as customers in large will shift to close substitutes present in the market. But in monopoly, the