Ch12 - Monopolistic Competition and Oligopoly

However economic theory cannot determine the exact

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monopoly power.  However, economic theory cannot determine the exact price that  results from this bilateral monopoly because the price depends on the bargaining  skills of the two parties, as well as on other factors, such as the elasticities of supply  and demand. 13.   Suppose the market for tennis shoes has one dominant firm and five fringe firms.  The market demand is Q=400-2P.  The dominant firm has a constant marginal cost of 20.  The fringe firms each have a marginal cost of MC=20+5q. a. Verify that the total supply curve for the five fringe firms is  Q f = P - 20 . The total supply curve for the five firms is found by horizontally summing the five  marginal cost curves, or in other words, adding up the quantity supplied by each  firm for any given price.  Rewrite the marginal cost curve as follows: MC = 20 + 5 q = P 5 q = P - 20 q = P 5 - 4 Since each firm is identical, the supply curve is five times the supply of one firm for  any given price: 217
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Chapter  12:  Monopolistic Competition and Oligopoly Q f = 5( P 5 - 4) = P - 20 . b. Find the dominant firm’s demand curve. The dominant firm’s demand curve is given by the difference between the market  demand and the fringe total supply curve: Q D = 400 - 2 P - ( P - 20) = 420 - 3 P . c. Find the profit-maximizing quantity produced and price charged by the dominant  firm, and the quantity produced and price charged by each of the fringe firms. The dominant firm will set marginal revenue equal to marginal cost.  The marginal  revenue curve can be found by recalling that the marginal revenue curve has twice  the slope of the linear demand curve, which is shown below: Q D = 420 - 3 P P = 140 - 1 3 Q D MR = 140 - 2 3 Q D . We  can   now  set  marginal  revenue  equal  to   marginal   cost   in  order  to   find   the  quantity produced by the dominant firm, and the price charged by the dominant  firm: M R = 140 - 2 3 Q D = 20 = MC Q = 180 P = 80 . Each fringe firm will charge the same price as the dominant firm and the total  output  produced  by  the  fringe  will be   Q f = P - 20 = 60 .    Each  fringe  firm  will  produce 12 units.   d. Suppose there are ten fringe firms instead of five.   How does this change your  results? We need to find the fringe supply curve, the dominant firm demand curve, and the  dominant firm marginal revenue curve as was done above.   The new total fringe  supply   curve   is   Q f = 2 P - 40 .     The   new   dominant   firm   demand   curve   is  Q D = 440 - 4 P .   The new dominant firm marginal revenue curve is  MR = 110 - Q 2 .   The dominant firm will produce where marginal revenue is equal to marginal cost  which occurs at 180 units.   Substituting a quantity of 180 into the demand curve  faced by the dominant firm results in a price of $65. Substituting the price of $65  into the total fringe supply curve results in a total fringe quantity supplied of 90, so  that each fringe firm will produce 9 units.  The market share of the dominant firm 
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