Page 210 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 13: Oligopoly

Price Leadership by Dominant Firm Notes

This is more common and happens when a dominant firm shares a larger part of the market

along with few small firms. It may become monopolist but compromises with the small rival
firms which in turn accept the dominant firm as the price setter and behave as if they are fi rms

under perfect competition i.e., price takers.

It is assumed that the dominant firm knows the aggregate market demand. It finds its own
demand curve by setting a price and deducts from the market demand the quantity supplied

jointly by the small firms. It also knows the supply curve of the small firms through a knowledge

of their individual MC curves. The part of the market demand not supplied by the small fi rms

will be its own share. Given a price, the market share of the dominant firm equals the market

demand less the share of small firms. Figure 13.4 shows the aggregate market demand curve
(AR) and the supply curve of the small fi rm (a) and dominant fi rm (b).
The gap between D and S of small fi rm determines the AR curve (D ) of the dominant fi rm.
S L

The dominant firm maximises its profit when MR=MC at point E. It sells Q units at price P. The

demand curve for small firm becomes the horizontal line PB which is AR as well as MR curve for
them. S is their MC or supply curve. They supply Q units at price P.
1
S
Figure 13.4: Price Leadership by a Dominant Firm under Oligopoly
C
S S
P MC
Price
Price
AC
A B Q
P P 1
AR /D S
E
S MR AR /D L
L
0 Q 1 Q 2 0 Q

Case Study Rumblings in the New York Skies
T he combination of United and Continental Airlines would upend the balance of

power at New York’s airports.
Continental was already the dominant player at Newark Liberty International
Airport. But in merging with United, it gains a much bigger network of domestic routes
and connections to the rest of the world that would leave its rivals in New York — Delta
Air Lines and American Airlines — struggling to catch up.
While the city would be just one of the 10 hubs of the new airline, the battle for control
in New York offers a window into why United and Continental found a merger so
attractive.

All the major airlines have been looking for ways to regain the upper hand as air travel
begins to rebound. And New York City was already a major focus of their attention.
Its airports — Kennedy International, La Guardia and Newark — play a critical role in both
domestic and international travel. Combined, they account for four of the top fi ve domestic
routes and constitute the biggest hub in the country for international fl ights.
Contd...

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