Bus 330 Final

The Potato Chip Industry

Carlos A. Figueroa

ECO/204

April 30, 2012

Felix Telado

The Potato Chip Industry

Two very clever lawyers found a way to purchase all of the firms in the potato chip industry in the Northwest of the United States. These firms where originally were a monopolistic competition. However, now that all the firms were virtually under one company with the two new owners, in essence, they changed the market condition where there was no competition and are now running as a monopoly named “The Wonks”. This paper will outline the benefits to the stakeholders due to the change in market conditions having to do with output and prices, as well as determine which market structure is more beneficial to the owners and consumers.

According to the text, monopolistic competition is a market condition where firms can easily enter or exit the market whose products are differentiated and are distinguished by price and competition and each firm relatively small compared to the size of the total market (Case, Fair, & Oster, 2009). The firms in the potato chip industry in the Northwest were being run under this market condition before the purchase. Because monopolistically competitive industries differentiate their products they reduce the elasticity of demand. In other words, individual firms have control over their prices and raise them without losing all of the demand for said product. While at first, monopolistic competition firms act like monopolies in the short run in that they may lower prices to increase output, they eventually increase production until they ensures that the marginal revenue is lower than the marginal cost to produce the product (Case, Fair, & Oster, 2009).

A monopoly is quite different from monopolistic competition. In a Monopoly, a single firm produces product where there are few or no substitutes (Case, Fair, & Oster, 2009). For a monopoly, one must assume that it must sell to all at the same price. Because there...