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14_01_lec30 - 1 Dominant Firm Model 1 14.01 Principles of...

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Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]. 1 1 Dominant Firm Model 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen November 30, 2007 Lecture 30 Dominant Firm Model and Factor Market Outline 1. Chap 12, 13: Dominant Firm Model 2. Chap 14: Factor Market 1 Dominant Firm Model The dominant firm model is the model that in some oligopolistic markets, one large firm has a major share of total sales, and a group of smaller firms supplies the remainder of the market. The large firm has power to set a price that maximizes its own profits. A dominant firm exists because it has lower marginal cost than the other fringe firms. Assume the fringe firms’ total supply is S F , the market demand is D M , then the dominant firm’s demand is (see Figure 1) D D = D M S F . Knowing D D , we can derive MR D . The dominant firm produces at a quantity Q D that satisfies MR D = MC D . Correspondingly, the price is P . The fringe firm’s supply curve thus shows Q F . Furthermore, the total quantity is Q T = Q F + Q D . Example (OPEC) . OPEC is an example of a successful cartel, which can be regarded as a dominant firm.
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