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Microeconomics for MBAs 44. The Economic Way of Thinking for Managers. Microeconomics for MBAs develops the economic way of thinking through problems that MBA students will find relevant to their career goals. Maths is kept simple and the theory is illustrated with real-life scenarios | Chapter 13 Imperfect Competition and Firm Strategy 6 were a pure monopoly it would not have to fear a loss of business to other producers because of a change in price. Inefficiency in this market is slightly greater than in a monopolistically competitive market see the shaded triangular area of Figure 13.3. The Oligopolist as Price Leader Alternatively oligopolists may look to others for leadership in determining prices. One producer may assume price leadership because it has the lowest costs of production the others will have to follow its lead or be underpriced and run out of the market. The producer that dominates industry sales may assume leadership. Figure 13.4 depicts a situation in which all the firms are relatively small and of equal size except for one large producer. The small firms collective marginal cost curve minus the large producer s is shown in part a along with the market demand curve Dm. The dominant producer s marginal cost curve MCd is shown in part b of Figure 13.4. FIGURE 13.4 The Oligopolist as Price Leader The dominant producer who acts as a price leader will attempt to undercut the market price established by small producers part a . At price P1 the small producers will supply the demand of the entire market Q2. At a lower price Pd or Pc the market will demand more than the small producers can supply. In part b the dominant firm determines its demand curve by plotting the quantity it can sell at each price in part a . Then it determines its profit-maximizing output level Qd by equating marginal cost with marginal revenue. It charges the highest price the market will bear for that quantity Pd forcing the market price down to Pd in part a . The dominant producer sells Q3-Q1 units and the smaller producers supply the rest. The dominant producer can see from part a that at a price of P1 the smaller producers will supply the entire market for the product say steel. At P1 the quantity demanded Q2 is exactly what the smaller producers are willing
