Excess Capacity under

Monopolistic Competition
LMC LA
C

k
p s
C
O
S e
T ar

o m n
m quantity
Excess Capacity
r
 Effect of Selling Cost
ASC

d d d d d
1 2 3 4 5 OUTPUT
q q q q q M
1 2 3 4 5 C A
e C
p AP l
C AS
t r
C
b
AC=APC+AS
AS d C
C
q
 Price and Output under Cartels
MCc=Mca+M
d Cb
MCa AC MCb MC
a AC c
f e b L
p p p
k
h D
g R
M
R
Q Q
Q
1 2
OQ=OQ1+OQ2
OUTPUT
 Price Leadership
Types of Price Leadership
1. Price leadership by a low cost firm
2. Price leadership of the dominant firm
Price-Output determination under low cost Price leadership firm:
Lets take the following assumptions-
a. There are two firms, A and B. The firm A has a lower cost of production
than B.
b. The product produced by the two firms are homogeneous so that the
consumers have no preference between them.
c. Each of the two firms has equal share in the market. In other words, DC
facing each firm will be the same and will be half of the total market
demand curve of the product.
Each firm is facing demand curve d which is half of the total market
demand curve DD for the product. MR is the marginal revenue curve of
each firm. ACa and MCa are the average and marginal cost curves of firm
A and ACb and MCb are the average and marginal cost curves of firm B.
Cost curves of firm A lie below the cost curves of firm B because we are
assuming that firm A has a lower cost of production than firm B.
Firm A will be maximizing its profits by AC
D
selling output OM and setting price OP, MCb b
since at OM, MC=MR. MCa
H
Firm B’s profits will be maximum when P D

Price & Cost

it fixes price OH and sells output ON. Market
Thus the price OP of firm A is lower Dema
E nd
than of B. Therefore, A will dictate the d
Price. Thus firm B is the follower.
o N M Q
MR
Output
Price-Output determination under Dominant Price leadership
Firm: The dominant firm is having a large share of the market
with a number of small firms as followers each of which has a small
share of the market. DD is the market demand for the product. At
each price the leader will be able to sell the part of the market
demand not fulfilled by the supply from the small firms.
 S
At price P1, the small firms supply the whole D
m
of the quantity of the product demanded
P
at
R
that price. Therefore, demand for leaders
1

Price & Cost

Product is zero. At price P2, the small firms B S
P
supply P2C and therefore, the remaining
P C T
part of CT will be supplied by the leader.
2
Like wise it goes on. P U
3 D
o
d
Quantity
MC
Kinked Demand Curve
Price & Cost

K
p

h
D/ AR

m output

MR