Dominant Firm Price Leadership

Question 1

What is DFPL?

Answer 1

Price is the strategic variable.
INTERDEPENDENT FIRMS.
The largest firm in the market is a price setter. They determine the price based on their profit maximisation function, and the other firms in the market match this price.

Question 2

How do we calculate the leader’s demand?

Answer 2

Qdl= Market Demand- Followers Supply

Question 3

How do we find the leader’s demand curve?

Answer 3

Find market equilibrium, and go across to the y-axis. This is the starting point.

Then find where the follower’s supply curve intersects with the y-axis, and trace across to where this intersects with the market demand curve. Between these two points is where the leader’s demand curve can be found.

Question 4

What type of price setting is this?

Answer 4

Sequential.

this is because price-taking firms watch the dominant firm and wait to see what they price the good at, then they’ll match.

Question 5

How do find find total quantity sold?

Answer 5

Quantity of Followers + Quantity of Leaders.

Difference between QL and Qf on diagram doesn’t mean anything.

Question 6

How to find leader’s profit maximising output?

Answer 6

Qd-Sf to find quantity function, then rearrange to find the inverse demand function. Then make equal to marginal cost.

Question 7

How do followers respond to price leadership?

Answer 7

Assuming identical products, they must always set the same price as the leader, then choose it’s profit-maximising output.