Monopolistically Competitive Market

Monopolistically competitive market

Dwight Frazier

ECO204: Principles of Microeconomics

Instructor: Harvey Criswell

10/17/2011

A monopoly is a market structure when there is one dominant producer in the industry with many consumers. There are many consumers of the goods produced and given that there is no competition in the industry, the monopolist firm makes profits both in the short-run and the long-run. Monopoly when viewed in the social sense offers more bad than good. In the case of a monopolistic competitive firm, when it makes profits in the short-run and given that there is freedom of entry and exit, firms will enter the industry and reduce the attractive profits that initially attracted them to the industry. When the profits reduce, firms begin to exit from the industry and after some period profits rise and cycle continues. This is what the smart lawyers were cushioning the firms from. They intended to protect the level of profits they get upon purchasing the firms. This is not the case in the monopoly firm; here there is no freedom of entry and exit. This is the concept that the two lawyers knew very well and were simply utilizing their knowledge. When the monopolist is making supernormal profits, no firm can enter the industry and it is this aspect that puts the firm in a position of being able to earn the supernormal profits both in the short-run and the long-run. Monopolies in Spanish America were grants of exclusive rights to individuals or interest groups for the production or commercialization of goods and services ( Kaufman & Francis 2005).

The two bright lawyers rightfully knew what they were doing and they bought the firms and made them a monopoly because they desired supernormal profits. They were informed of their actions and they desired excess profits as of right and being lawyers they knew how they were protected and even if they exploited the consumer nobody was in the position to do anything. In a monopolist venture the stakeholders among others are; the government, consumers and the businesses.

The government is the organ responsible for licensing of businesses and when the lawyers made the numerous firms to one firm, the government will get less money as charges it used to collect from the numerous firms. In the other hand, the government will get increased pay from tax it imposes on the profit of a monopoly. This is because the firm operating as a monopoly will get more profits than the individual firms’ profits combined. Given that the government charges tax at a specific rate, an increase in the gross profits of the firm due to its existence as a monopoly will increase the tax revenue collected by the government.

Businesses operating as a monopoly have several benefits from the combination they