PRICE LEADERSHIP MODEL IN MONOPOLISTIC COMPETITION PGDM-BA II Semester Batch

Monopolistic competition is a market structure in which there are many sellers of a commodity, but the product of each seller differs from that of the other sellers in one respect or the other. MONOPOLISTIC COMPETITION

Large no. of Firms &Buyers. Free Entry & Exit. Product Differentiation. Independent Pricing Features Of Monopolistic Competition

Price Leadership

The Price-Leadership Price leadership occur when specific firms in a group set a price that subsequently determines what other members of the group will change.

The Price-Leadership Model Assumptions 1. The industry is made up of one large firm and a number of smaller, competitive firms; 2. The dominant firm maximizes profit subject to the constraint of market demand and subject to the behavior of the smaller firms; 3. The dominant firm allows the smaller firms to sell all they want at the price the leader has set.

The Price-Leadership Model Outcome 1. The quantity demanded in the industry is split between the dominant firm and the group of smaller firms. 2. This division of output is determined by the amount of market power that the dominant firm has.

1. has a big cost advantage over the other firms. 2. sells a large part of the industry output. 3. sets the market price (price maker) A dominant firm may exist if one firm

The Dominant Firm Model D is the market demand curve, and S F is the supply curve (i.e., the aggregate marginal cost curve) of the smaller fringe firms. The dominant firm must determine its demand curve D D. As the figure shows, this curve is just the difference between market demand and the supply of fringe firms. At price P 1, the supply of fringe firms is just equal to market demand; thus the dominant firm can sell nothing. At a price P 2 or less, fringe firms will not supply any of the good, so the dominant firm faces the market demand curve. At prices between P 1 and P 2, the dominant firm faces the demand curve D D. Price Setting by a Dominant Firm

The Dominant Firm Model The dominant firm produces a quantity Q D at the point where its marginal revenue MR D is equal to its marginal cost MC D. The corresponding price is P*. At this price, fringe firms sell Q F Total sales equal Q T. Price Setting by a Dominant Firm

Price leadership by a dominant firm SMC d ΣSMCs ($) F Quantity( Q) PricePrice G mr d 2 B C 12 A H K L E 7 6 J

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