A market structure is the interconnected characteristic of a market. The characteristics include the level of competition, the extent of product differentiation, barriers to entry, pricing and supply. The type of market structure, which firms and industries occupy influence their behavior (Menger, 2001). Firms and industries operate in structures that best suit their interests. This is also inclusive of the profits gained and the cost of production involved.
A monopolistic competition is a form of a market structure that has many firms selling similar products but the products are not identical. It is an example of an imperfect competition. The characteristics in this form of the market include; the existence of many sellers, firms has the ability to differentiate their products and free entry into the market by other firms (Menger, 2001).
A monopoly in contrast is a market structure in which there is the existence of one firm / industry that operates the market. It also has high barriers that prevent other firms in venturing the market. A monopoly market structure has no close substitutes for the kind of commodities it produces. In the long -run, firms in a monopolistic market structure earn no/ zero economic profits. This is because profit is equal to average total cost. (P = ATC).
However, when firms in a monopolistic competition are incurring losses, the firms will have an incentive to exit. This results to a reduced amount of products that consumers can choose .The process of entry and exit of firms in the market progresses until the firms earn zero profits. Thus, the average total cost curve and the demand curve are tangent to each other. At this particular point, price is equal to average total cost. Thus, the firmsí economic profit is zero.
The market power of firms that are monopolistic is often derived from product differentiation and market segmentation. Unlike a monopolist, the ability of monopolistic firms to set market prices for their products is usually constrained by the existence of many close substitutes. Thus, the demand of a monopolistic firm is price elastic than the demand curve of a monopolist† (Robinson , 1933). A monopoly does not face competition. Common barriers of entry into a monopoly include control of a scarce resource, economies of scale, and legal barriers to entry and network externalities.
Wonks, has many advantages running as a monopoly to its stakeholders. The business, will benefit as it will enjoy increased returns which is the main core in any business enterprise. Increased returns are caused by; enough capital for research. Market research ensures that the industry can identify with the needs of consumers (Robinson, 1933). This helps them plan adequately on how best to produce, distribute and price the potato chips to the business advantage and the consumers. Adequate research will also enable the monks industry identify barriers to effective business management and various causes that may lead failure of the industry.
The operations of Wonks as a monopoly will also benefit the company in using efficiently the available resources. This is because the industry is in a better position to utilize its waste products. The waste products in one firm are used inputs in another firm. The waste product can also aid in the manufacturing process within the firm.
The industry will also benefit from adequate transfer of technological knowhow in the running of the firms and in the production process. This is because firms operating under the monopoly market structure have easy diffusion of technological knowledge. This ensures that products produced are often of high quality that satisfies the consumers adequately. †Operations of Wonks as a monopoly are beneficial to consumers. This is due to potential reuse of its waste products, which can help prevent pollution. This leads to the general well-being of the consumers and the society. A monopoly market structure also results to a reduced price of its commodities due to its ability to operate in large scale.
The government can also benefit from the transition from monopolistic competition to a monopoly. This effect can be clearly seen for revenue a monopoly firm earns. High revenue results to an increased amount of taxation. This enables effective governance.
Monopolists can use the price discrimination mechanism to set up their prices. On pricing, most monopolists use price discrimination mechanism in pricing their products (Menger & Carl, 2001). The advantage of price discrimination is that the low-income earners are in a position to access products that they would not have been able to access.
Since a monopoly supplies the entire market, the Wonks industry can choose the amount of price to levy on its products and let the consumers choose the amount of quantity that needs to be supplied in the market. Attainment of equilibrium is often when the price is favorable to the consumers and the amount produced is equal to the amount consumed. This will enable the industry in identifying the right amount to produce and at a particular price. It can also choose the amount of quantity and view the amount of money consumers are willing to pay on the commodity. The industry can use either way since results are similar.
A monopolistic market however, sets its price according to the demand curve. I.e. the lower the prices, the higher the amount of products demanded. This result to an increase for quantity produced (Menger & Carl, 2001). However, if the price increases, less of that commodity is in demand. This results to an increase in the number of suppliers and consequently the amount of production. This leads to lowered prices. The process progresses until the market is at equilibrium. However, a monopoly has different ways of setting the amount of commodities that they produce in the market and their prices. Hence, it chooses the level of price and output that best maximizes its revenue.
A monopoly market structure is beneficial for Wonks to operate. A monopoly market structure will enable Wonks experience abnormal profits even in the long- run. The unavailability of substitutes ensures that the industry has control over the market share.† The industry will also benefit from cost advantage due to economies of scale.
However, the consumers may not benefit as much as the industry. This is because the consumers lack variety. The products in a monopoly market lack differentiation. This results to lack of diversity. The consumers are also not able to regulate pricing in the market. They are price takers and often have to go with the prices set by the industry. Since the Wonks are running as sole providers in the market, they lack competition. Lack of competition may result to inefficiency. Inefficiency can be in the form of technological expertise in the manufacturing process resulting to poor quality or quantity of commodities and poor customer relations.
In conclusion, the market that best suits Wonks is the monopoly market. This is mainly due to the advantages it derives operating on its own.