Suppose the market demand for a homogeneous product is given by Q = a - bP, where a and b are positive constants. The product is supplied by a dominant firm with a constant marginal cost c > 0 and n competitive fringe firms, each of which has a cost function ci(qi) = (qi^2)/(2ki) for i = 1, ... , n, where ki > 0 is a parameter. Suppose the dominant firm moves first by setting a price P, followed by competitive fringe rms setting their quantities, taking the price as given.

a). Compute the equilibrium price and quantity level for each firm.

b). How does the presence of competitive fringe firms affect the equilibrium price, as compared to the monopoly price by the dominant firm?

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Solution a The direct demand curve will generally take ... View the full answer