F423DFM - FIN 423 Dominant Firm Monopoly Spring 2004 FIN...

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FIN 423 Dominant Firm Monopoly Spring 2004 (c) Prof. G. William Schwert, 1998-2004 1 Assume that industry is made up of one large firm (perhaps created by a merger/tender offer), and many smaller price-taking competitors "dominant firm" has a comparative advantage (lower MC of production) "dominant firm" can afford to restrict its output, let price-taking firms sell as much as they want, and still increase its own profits FIN 423 Dominant Firm Monopoly Model First consider industry equilibrium without monopolistic behavior industry supply is the horizontal sum of dominant firm's MC and fringe firms' supply curves equilibrium price and quantity occur where demand = supply Dominant Firm Monopoly Model: Competitive Solution
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FIN 423 Dominant Firm Monopoly Spring 2004 (c) Prof. G. William Schwert, 1998-2004 2 0 10 20 30 40 50 60 70 80 90 Units Price/Unit Fringe Supply Dom Firm MC Dominant Firm's MC Fringe Firms' Supply Industry Demand Industry Supply Qc Pc Dominant Firm Monopoly Model: Competitive Solution The demand curve facing the dominant firm is the horizontal difference between the industry demand and the fringe firms' supply curve i.e., let the fringe firms sell as much as they want at any given price level, without restricting output only works if dominant firm has cost advantage Dominant Firm Monopoly Model: Fringe Firms as Price-takers
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FIN 423 Dominant Firm Monopoly Spring 2004
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F423DFM - FIN 423 Dominant Firm Monopoly Spring 2004 FIN...

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