Dominant Firm / Competitive Fringe Model 1. Draw D M, MC f, AC f, S f, MC DF, AC DF 2. Find P @ MC f...

Dominant Firm / Competitive Fringe Model

1. Draw DM, MCf, ACf, Sf, MCDF, ACDF

2. Find P @ MCf = ACf

3. Kink @ P = DM

4. P0 @ Sf = DM

5. Draw MRr

6. MCDF = MRr qDF,

P = qDF @ Dr

7. P = MCf qf, P = Sf Qf

8. P = DM Q

Dr

gap @ kinkMRM steeper after gap(DM steeper than Dr)

$

Q

ACDF

MCDF

DM

Sf

ACfMCf

MRM

MR r

D r

qf Qf qDF QM

PP

P0

Step 1: Start GraphDraw DM, MCf, ACf, Sf, MCDF, ACDF

Q

$

ACDF

MCDF

DM

Sf

ACfMCf

Step 2: Shutdown priceshutdown P @ MCf = ACf

Q

$

ACDF

MCDF

DM

Sf

ACfMCf

P

Steps 3&4: Find Residual Demand P’s where fringe supplies all or none

Q

$

ACDF

MCDF

DM

Sf

ACfMCf

D rP0

P

Step 5: Residual MR(slopes) Dr < MRr < MRM

Q

$

ACDF

MCDF

DM

Sf

ACfMCf

MRM

MR r

D rP0

P

Step 6: DF output, priceqDF @ MCDF=MRr; price from Dr

Q

$

ACDF

MCDF

DM

Sf

ACfMCf

MRM

MR r

D r

qDF

P0PP

Step 7: fringe q, Qqf @ Price = MCf; Qf @ Price = Sf

Q

$

ACDF

MCDF

DM

Sf

ACfMCf

MRM

MR r

D r

qf QfqDF

P0PP

Step 8: Total Q for MarketPrice @ Market D yields Market Q

Q

$

ACDF

MCDF

DM

Sf

ACfMCf

MRM

MR r

D r

qf QfqDF QM

P0PP

Dominant Firm / Competitive Fringe Model

1. Draw DM, MCf, ACf, Sf, MCDF, ACDF

2. Find P @ MCf = ACf

3. Kink @ P = DM

4. P0 @ Sf = DM

5. Draw MRr

6. MCDF = MRr qDF,

P = qDF @ Dr

7. P = MCf qf, P = Sf Qf

8. P = DM Q

Dr

gap @ kinkMRM steeper after gap(DM steeper than Dr)

$

Q

ACDF

MCDF

DM

Sf

ACfMCf

MRM

MR r

D r

qf Qf qDF QM

PP

P0

Comparison vs. Monopoly

Q

$

ACDF

MCDF

DM

MRM

MR r

D r

qDF QM

P

PM

QM

Dominant Firm as Natural Monopoly

Q

$

ACDF

MCDF

DM

SfACfMCf

MRM

MR r

D r

qDF (= QM )

P0

PP

COSTLESS ENTRY

Q

$

ACDFMCDF

DM

Sf

ACfMCf

MRM

MRrDr =

P

COSTLESS ENTRY

Q

$

ACDFMCDF

DM

Sf

ACfMCf

MRM

MRrDr =

qf qDF QM

P