Dominant Firm with a Competitive Fringe

1. Dominant Firm with a Competitive Fringe … monopolist meets competition COL Gutermuth - Industrial Organization

2. In One Market … • Dominant Firm • One firm, a price-setter • Faces smaller, price-taking firms • Has large market share • Fringe Firms • Smaller, price-taking firms • Each has small market share COL Gutermuth - Industrial Organization

3. How Does a Firm Become Dominant? Maybe • Smaller, higher-cost firms enter a monopoly market OR • Lower-cost firm enters a relatively “competitive” market COL Gutermuth - Industrial Organization

4. Conclusions, Ahead of Time • It is not in the dominant firm’s best interest to set price so low as to drive out the fringe firms. • The presence of (or threat of) the fringe firms keeps the dominant firm’s price below the monopoly price. COL Gutermuth - Industrial Organization

5. “No Entry” Model COL Gutermuth - Industrial Organization

6. Dominant Firm Behavior • Determine Residual Demand • Act like a monopolist • Choose output such that MC=MR • Let fringe supply as much as they want at price p COL Gutermuth - Industrial Organization

7. Why Not Monopoly Price? • The presence of (or threat of) the fringe firms keeps the dominant firm’s price below the monopoly price. • Fringe could sell at lower price!!! COL Gutermuth - Industrial Organization

8. “Free Entry” Model COL Gutermuth - Industrial Organization

9. “Free Entry” Model • Fringe firms’ profits = 0 in LR • Price cannot be above min. AC for fringe firms • Dominant firm CAN earn positive profits The presence of (or threat of) the fringe firms STILL keeps the dominant firm’s price below the monopoly price. COL Gutermuth - Industrial Organization