Monopolistic Competition Case Study

1485 Words 6 Pages
Register to read the introduction… The government is the only entity that can force other companies out of a market. This “force out” can definitely cause controversy in the marketplace. (capitalism.org) The owners of Wonks can push the government to impose restrictions on competition. If other business owners in the market found out about this, they would use as much negative publicity as possible. This would provide an entry barrier into the market. Also low prices can reduce the profit margins for new industries and act as what economists could call an entry barrier as well. Let’s say Wonks has a patent on a cooking method for their potato chips which is one of their techniques, a secret blend of spices to improve the product it offers, or a patent on the growing method of the potato. Government patents encourage innovation and research to come up with a better cooking process once the patent has expired. In the US, a patent normally lasts for 20 years. Competitors would be enticed to improve the growing method making a more perfect potato in a shorter amount of time. Competitors would also be interested in creating their own secret spice to create a new and trendy marketing niche. The idea that advertising creates a monopoly was supported by studies that found high rates of return in industries with high levels of advertising. Consumers will pay more for a product if they see more advertisements for …show more content…
If they raise their prices, they will only lose a small amount of customers. A monopoly is a large enough business to influence its own price, such that it is the price setter rather than taker, unlike a perfectly competitive market where each firm faces a perfectly elastic demand curve. Wonks should start at the highest price possible. Wonks will begin to slowly lose sales. However a monopoly must lower price to increase output and sell it. Output will increase and be a lot more substantial than in a monopolistic competitive market. If a substantial amount of money is invested in inventory and it is not moving for some reason, the monopoly would lower prices as well. Fear of competition in a monopoly also works in the consumer’s favor by providing the consumer with improved products and better pricing. In a monopolistic competitive market, industries will produce as much as they can sell. When they have sold enough products to pay to produce more products, then they will start production again. Monopolistic competitive firms do not have the money to invest into inventory like monopolies do. If profit is greater than zero, businesses will enter, and each company's market share will fall because of more variety.

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