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Goetz & McChesney, Antitrust LawDF-1
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Chapter 4 -- The Dominant Firm ModelChapter 4 -- The Dominant Firm Model
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Copyright © 1998, All Rights ReservedCopyright © 1998, All Rights Reserved
Use of these materials is licensed only to persons who are the legal owners of a copy of Goetz & McChesney, Antitrust Law: Interpretation and Implementation
Goetz & McChesney, Antitrust LawDF-2
The Dominant Firm ModelThe Dominant Firm Model
Exhibit 10 - Dominant Firm; Tabular Model
Exhibit 11 - Deriving Fringe Supply Curve
Exhibit 12 - Dominant Firm; Diagrammatic Model
Marginal Cost as Production Constraint/Determinant
Why Suffer This Pain?
Notes and Questions
Goetz & McChesney, Antitrust LawDF-3
Model Provides Insights InModel Provides Insights InMany Areas of Antitrust LawMany Areas of Antitrust Law
Why “monopoly” doesn’t require monopoly. Why “predation” might be tempting. Mergers: Why concentration is bad, even
without collusion Vertical restraints: facilitating oligopoly. Conspiracy: “Chiselers” Importance of the “Competitive Fringe” firms. Competitive Advantage: Lawyer Ignorance.
Goetz & McChesney, Antitrust LawDF-4
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Goetz & McChesney, Antitrust LawDF-5
Q’ Q’’ Q’’’
Marginal Revenue Curves
MarginalRevenue
Quantity
$
0
Goetz & McChesney, Antitrust LawDF-6
Q’ Q’’ Q’’’
Marginal Cost Curves
MarginalRevenue
Quantity
$
0
MarginalCost
Goetz & McChesney, Antitrust LawDF-7
DETERMINATION OF PROFIT-MAXIMIZING OUTPUT
MarginalRevenue
Quantity
$
0
MarginalCost
The Golden Spot
where MC=MR
Q’
Goetz & McChesney, Antitrust LawDF-8
DETERMINATION OF PROFIT-MAXIMIZING OUTPUT
MarginalRevenue
Quantity
$
0
MarginalCost
Q*
MC=MR
Goetz & McChesney, Antitrust LawDF-9
Quantity
$
0
MarginalRevenue
Q*Q1
Outputs other than MC=MR do not maximize profits
Foregone profits at insufficient output Q1
MarginalCost
Goetz & McChesney, Antitrust LawDF-10
Outputs other than MC=MR do not maximize profits.
Quantity
$
0
MarginalRevenue
Q*
Losses on excessive outputs between Q* and Q2
Qb
MarginalCost
Goetz & McChesney, Antitrust LawDF-11
Summary: Outputs other than MC=MR do not maximize profits.
Quantity
$
0
MarginalRevenue
Q*
• Foregone profits at Q1
• Losses on units between Q* and Q2
Q2Q1
MarginalCost
Goetz & McChesney, Antitrust LawDF-12
For Competitive Firms, MR = Price
Quantity
$
0
MarginalRevenue
MarginalCost
MarginalRevenue
Q 1
Goetz & McChesney, Antitrust LawDF-13
Competitive Firms: Reaction to Price Changes
Quantity
$
0
Q 2 Q 3Q 1
MarginalCost
p1
p2
p3
Goetz & McChesney, Antitrust LawDF-14
For Competitive Firms: MC Curve is Supply Curve
Quantity
$
0
Q 2 Q 3Q 1
MarginalCost
p1
p2
p3
Goetz & McChesney, Antitrust LawDF-15
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Goetz & McChesney, Antitrust LawDF-16
Exhibit 10 - “Dominant Firm” Model Exhibit 10 - “Dominant Firm” Model (p. 322)(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
MarketMarket Production By Fringe FirmsProduction By Fringe Firms Economic Calculus for Dominant FirmEconomic Calculus for Dominant Firm
Price Q D* F1 F2 F3 Fringe QR TR +R TC +C Profit80.0 0.0 397.5 10.32 30.80 19.25 60.37 0.00 0.00 0.00 0.00 0.00 0.0079.9 0.1 397.0 10.32 30.76 19.23 60.30 0.00 0.00 0.00 0.00 0.00 0.00
***44.3 35.7 219.0 8.93 16.52 10.33 35.78 0.00 0.00 0.00 0.00 0.00 0.0044.2 35.8 218.5 8.93 16.48 10.30 35.71 0.09 4.19 4.19 0.05 0.05 4.14
25.5 54.5 125.0 7.63 9.00 5.63 22.25 32.25 822.26 1.24 120.10 1.21 702.1625.4 54.6 124.5 7.62 8.96 5.60 22.18 32.42 823.47 1.20 121.31 1.21 702.1525.3 54.7 124.0 7.61 8.92 5.58 22.11 32.59 824.63 1.17 122.54 1.22 702.1025.2 54.8 123.5 7.60 8.88 5.55 22.03 32.77 825.77 1.13 123.76 1.23 702.01
***21.9 58.1 107.0 7.27 7.56 4.73 19.56 38.54 844.12 0.01 167.84 1.44 676.2821.8 58.2 106.5 7.26 7.52 4.70 19.48 38.72 844.09 -0.02 169.28 1.45 674.8121.7 58.3 106.0 7.25 7.48 4.68 19.40 38.90 844.04 -0.06 170.74 1.45 673.3021.6 58.4 105.5 7.24 7.44 4.65 19.33 39.07 843.95 -0.09 172.20 1.46 671.75
***12.1 67.9 58.0 5.87 3.64 2.28 11.79 56.11 678.95 -3.36 342.91 2.16 336.0412.0 68.0 57.5 5.85 3.60 2.25 11.70 56.30 675.56 -3.40 345.08 2.17 330.4811.9 68.1 57.0 5.83 3.56 2.23 11.62 56.48 672.12 -3.43 347.25 2.18 324.8711.8 68.2 56.5 5.81 3.52 2.20 11.53 56.67 668.66 -3.47 349.44 2.18 319.2211.7 68.3 56.0 5.79 3.48 2.18 11.45 56.85 665.15 -3.50 351.63 2.19 313.53
44.1 35.9 218.0 8.92 16.44 10.28 35.63 0.27 11.70 7.50 0.14 0.09 11.56***
25.7 54.3 126.0 7.65 9.08 5.68 22.40 31.90 819.76 1.30 117.69 1.20 702.0725.6 54.4 125.5 7.64 9.04 5.65 22.33 32.07 821.03 1.27 118.89 1.20 702.14
Goetz & McChesney, Antitrust LawDF-17
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Goetz & McChesney, Antitrust LawDF-18
(p. 324)Exhibit 11 - Deriving Fringe Supply CurveExhibit 11 - Deriving Fringe Supply Curve
0 10 20 30 40 50 60Quantity Produced
0
10
20
30
40
50
60
70
80Pri
ce
a b c d
F1 F2F3
"Com
petitive F
ringe" S
upply
$44.10
Goetz & McChesney, Antitrust LawDF-19
Construction of Supply CurvesConstruction of Supply Curves fromfrom
Fringe Firms’ Marginal Cost SchedulesFringe Firms’ Marginal Cost Schedules
Goetz & McChesney, Antitrust LawDF-20
0 10 20 30 40 50 60
Quantity Produced
0
10
20
30
40
50
60
70
80Pri
ce F1 F2F3
"Com
petitive F
ringe" S
upply
Entry Price for F1
$44.10
a
Goetz & McChesney, Antitrust LawDF-21
0 10 20 30 40 50 60
Quantity Produced
0
10
20
30
40
50
60
70
80Pri
ce F1 F2F3
"Com
petitive F
ringe" S
upply
$44.10
c
Goetz & McChesney, Antitrust LawDF-22
0 10 20 30 40 50 60
Quantity Produced
0
10
20
30
40
50
60
70
80Pri
ce F1 F2F3
"Com
petitive F
ringe" S
upply
$44.10
b
Goetz & McChesney, Antitrust LawDF-23
0 10 20 30 40 50 60
Quantity Produced
0
10
20
30
40
50
60
70
80Pri
ce
a b cd
F1 F2F3
"Com
petitive F
ringe" S
upply
$44.10
Goetz & McChesney, Antitrust LawDF-24
0 10 20 30 40 50 60
Quantity Produced
0
10
20
30
40
50
60
70
80Pri
ce
d
F1 F2F3
"Com
petitive F
ringe" S
upply
$44.10
Adding MC Curves Horizontally To Derive Fringe Supply Curve
Goetz & McChesney, Antitrust LawDF-25
0 10 20 30 40 50 60
Quantity Produced
0
10
20
30
40
50
60
70
80Pri
ce
a b c d
F1 F2F3
"Com
petitive F
ringe" S
upply
$44.10
Summary: Exhibit 11 Derivation Completed
Exhibit 10Exhibit 10(Table)(Table)
Goetz & McChesney, Antitrust LawDF-26
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Goetz & McChesney, Antitrust LawDF-27
(p. 325)Exhibit 12 - Dominant Firm, Diagrammatic ModelExhibit 12 - Dominant Firm, Diagrammatic Model
10 20 30 40 50 60 70 80 90 100
QUANTITY
00
10
20
30
40
50
PR
ICE
Frin
ge S
uppl
y
Market D
emand
Residual Demand
Residual M
R
MCDF
Competitive Supply
a
b c
d
e f
(Fringe Absorbs Entire Market Demand Above This Price)
Goetz & McChesney, Antitrust LawDF-28
Step-by-step ReconstructionStep-by-step Reconstruction
of theof the
Dominant Firm’sDominant Firm’s
Output DeterminationOutput Determination
Goetz & McChesney, Antitrust LawDF-29
10 20 30 40 50 60 70 80 90 100
QUANTITY
00
10
20
30
40
50
PR
ICE
Frin
ge S
uppl
y
Market D
emand
Residual Demand
Residual M
R
MCDF
Competitive Supply
a
b c
d
e f
(Fringe Absorbs Entire Market Demand Above This Price)
and rebuild it step by step.Let’s “decompose” the original diagram
Goetz & McChesney, Antitrust LawDF-30
10 20 30 40 50 60 70 80 90 100
QUANTITY
00
10
20
30
40
50
PR
ICE
Frin
ge S
uppl
y
Market D
emand
(Fringe Absorbs Entire Market Demand Above This Price)
Goetz & McChesney, Antitrust LawDF-31
Transitioning . . .
Goetz & McChesney, Antitrust LawDF-32
10 20 30 40 50 60 70 80 90 100
QUANTITY
00
10
20
30
40
50
PR
ICE
Frin
ge S
uppl
y
Market D
emand
(Fringe Absorbs Entire Market Demand Above This Price)
Residual Demand
Constructing the Residual Demand Curve
RepeatRepeat
Goetz & McChesney, Antitrust LawDF-33
Residual Demand Curve in Exhibit 10 Residual Demand Curve in Exhibit 10 (p. 322)(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
MarketMarket Production By Fringe FirmsProduction By Fringe Firms Economic Calculus for Dominant FirmEconomic Calculus for Dominant Firm
Price Q D* F1 F2 F3 Fringe QR TR +R TC +C Profit80.0 0.0 397.5 10.32 30.80 19.25 60.37 0.00 0.00 0.00 0.00 0.00 0.0079.9 0.1 397.0 10.32 30.76 19.23 60.30 0.00 0.00 0.00 0.00 0.00 0.00
***44.3 35.7 219.0 8.93 16.52 10.33 35.78 0.00 0.00 0.00 0.00 0.00 0.0044.2 35.8 218.5 8.93 16.48 10.30 35.71 0.09 4.19 4.19 0.05 0.05 4.14
25.5 54.5 125.0 7.63 9.00 5.63 22.25 32.25 822.26 1.24 120.10 1.21 702.1625.4 54.6 124.5 7.62 8.96 5.60 22.18 32.42 823.47 1.20 121.31 1.21 702.1525.3 54.7 124.0 7.61 8.92 5.58 22.11 32.59 824.63 1.17 122.54 1.22 702.1025.2 54.8 123.5 7.60 8.88 5.55 22.03 32.77 825.77 1.13 123.76 1.23 702.01
***21.9 58.1 107.0 7.27 7.56 4.73 19.56 38.54 844.12 0.01 167.84 1.44 676.2821.8 58.2 106.5 7.26 7.52 4.70 19.48 38.72 844.09 -0.02 169.28 1.45 674.8121.7 58.3 106.0 7.25 7.48 4.68 19.40 38.90 844.04 -0.06 170.74 1.45 673.3021.6 58.4 105.5 7.24 7.44 4.65 19.33 39.07 843.95 -0.09 172.20 1.46 671.75
***12.1 67.9 58.0 5.87 3.64 2.28 11.79 56.11 678.95 -3.36 342.91 2.16 336.0412.0 68.0 57.5 5.85 3.60 2.25 11.70 56.30 675.56 -3.40 345.08 2.17 330.4811.9 68.1 57.0 5.83 3.56 2.23 11.62 56.48 672.12 -3.43 347.25 2.18 324.8711.8 68.2 56.5 5.81 3.52 2.20 11.53 56.67 668.66 -3.47 349.44 2.18 319.2211.7 68.3 56.0 5.79 3.48 2.18 11.45 56.85 665.15 -3.50 351.63 2.19 313.53
44.1 35.9 218.0 8.92 16.44 10.28 35.63 0.27 11.70 7.50 0.14 0.09 11.56***
25.7 54.3 126.0 7.65 9.08 5.68 22.40 31.90 819.76 1.30 117.69 1.20 702.0725.6 54.4 125.5 7.64 9.04 5.65 22.33 32.07 821.03 1.27 118.89 1.20 702.14
Numbers Corresponding ToThe Residual Demand Curve
Goetz & McChesney, Antitrust LawDF-34
Residual M
R
MCDF
10 20 30 40 50 60 70 80 90 100
QUANTITY
00
10
20
30
40
50
PR
ICE
Frin
ge S
uppl
y
Market D
emand
Residual Demand
The DF’s Output Decision
Profit-maximizing Price for the DFProfit-maximizing Price for the DF
Goetz & McChesney, Antitrust LawDF-35
10 20 30 40 50 60 70 80 90 10000
10
20
30
40
50
PR
ICE
Frin
ge S
uppl
y
Market D
emand
Residual Demand
Residual M
R
MCDF
b ce f
The Relative Market Shares
DF’s Sales Fringe Sales
Profit-maximizing Price for the DFProfit-maximizing Price for the DF
Goetz & McChesney, Antitrust LawDF-36
10 20 30 40 50 60 70 80 90 100
QUANTITY
00
10
20
30
40
50
PR
ICE
Frin
ge S
uppl
y
Market D
emand
Residual Demand
Residual M
R
MCDF
Competitive Supply
Comparison of DF and Competitive Prices
Goetz & McChesney, Antitrust LawDF-37
10 20 30 40 50 60 70 80 90 100
QUANTITY
00
10
20
30
40
50
PR
ICE
Frin
ge S
uppl
y
Market D
emand
Residual Demand
Residual M
R
MCDF
Competitive Supply
a
b c
d
e f
(Fringe Absorbs Entire Market Demand Above This Price)
Exhibit 12 Derivation Completed
Goetz & McChesney, Antitrust LawDF-38
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Goetz & McChesney, Antitrust LawDF-39
Dominant Firm Notes and QuestionsDominant Firm Notes and Questions
Questions 1-4Questions 1-4
Questions 5-6Questions 5-6
Questions 7-8Questions 7-8
Questions 9-11Questions 9-11
Answer Slides Q5 & Q6 Only
Goetz & McChesney, Antitrust LawDF-40
1. In what sense is a dominant firm "dominant"? Does it oppress its competitors in any way? If not, how is the adjective being used?2. Competitors to the dominant firm are sometimes described as operating under its "umbrella." What do you think this means? Does it mean that the competitive fringe firms are reaping a supracompetitive price?3. What is the relationship between the discussion in this section and Exhibit 2 (entitled "Effect of Chiselers on a Price-Fixing Conspiracy") from the opening Cournotia scenario in Ch. 1?4. What is the approximate "competitive" price that would rule either if DF were broken up or if it could be compelled to price where MC=P? [Hint: Using the table in Exhibit 10, find the approximate price that would equate the quantity demanded listed in column (2) with the total quantity supplied by the Fringe, from column (7), plus the former DF, from column (3).]
Dominant Firm Notes and Questions: Q1-Q4
Ex.10
Goetz & McChesney, Antitrust LawDF-41
6. Show that the dominant firm model also implicates allocative inefficiency: an insufficient amount of inputs are being devoted to production of the product. [Hint: What is the value of an additional unit of output to a consumer? What is the value of the inputs that would be required to produce one more unit?]
Dominant Firm Notes and Questions: Q5-Q6 (Click on Ques.)
5. In Ch. 1, one of the failures of economic "efficiency" was described as occurring when the use of "wasteful" production processes "would make it possible to get more of the same output without increasing the existing level of inputs." Use the models in this section to show that the dominant firm result involves production inefficiency. [Hint: At the price of 25.50, what is the cost of the last unit of product produced by the competitive fringe producers? What is the marginal cost of the next unit that could be produced by the DF? If one unit of product were shifted from the fringe to the DF (thus holding output constant), what would happen to the cost of the inputs employed?] Does the information in Exhibit 12 permit the magnitude of the production inefficiency to be estimated?
Goetz & McChesney, Antitrust LawDF-42
7. Although OPEC is popularly described as a cartel, many observers believe that most members of OPEC covertly ignore the production quotas and behave like the competitive fringe in our dominant firm model. Who would be the putative dominant firm in this scenario? Does the dominant firm model give you any new insight into how the market for crude oil behaves?
8. Having a firm with quite a large share of the market is a necessary condition for the bad effects of the dominant firm model to emerge. Why is it not a sufficient condition? [Hint: The marginal cost (supply) curves of the competitive fringe were assumed to be relatively steep in the examples developed in the text. Suppose that they were much flatter. What would be the implications of that? Does a firm even have to be currently present in the market for it to be, in effect, part of the competitive fringe? Recall the lesson of the Waste Management case.]
Dominant Firm Notes and Questions: Q7-Q8
Goetz & McChesney, Antitrust LawDF-43
Dominant Firm Notes and Questions: Q9-Q11
9. Does the poor market performance depicted in the dominant
firm model depend in any way on "bad conduct" by the DF? Is it
illegal for the DF to restrain its own production in order to raise
prices above the "competitive" level? Should it be illegal?
10. Does the dominant firm model give you any ideas as to what might happen if there is more than one very large firm, i.e., an oligopoly? In the dominant firm model, the DF should expect its competitors to react in the worst possible way (from the DF's perspective). How, if at all, would this differ in an oligopoly?
11. Looking ahead, do you see the relevance of the dominant firm model to merger regulation under §7 of the Clayton Act? Do you see applications in other areas of antitrust law?
Goetz & McChesney, Antitrust LawDF-44
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Goetz & McChesney, Antitrust LawDF-45
Production Situation With Dominant Firm PricingProduction Situation With Dominant Firm Pricing
10 20 30 40 50 60 70 80 90 10000
10
20
30
40
50
PR
ICE
Frin
ge S
uppl
y
Market D
emand
Residual Demand
Residual M
R
MCDF
Competitive Supply
a
b c
d
e f
DF’s Sales Fringe Sales
Fringe Sales
Goetz & McChesney, Antitrust LawDF-46
Fringe Firm Costs Greatly Exceed DF’s CostsFringe Firm Costs Greatly Exceed DF’s Costs
10 20 30 40 50 60 70 80 90 10000
10
20
30
40
50
PR
ICE
Frin
ge S
uppl
y
Market D
emand
Residual Demand
Residual M
R
MCDF
Competitive Supply
a
c
d
e f
Goetz & McChesney, Antitrust LawDF-47
Value of Additional Output to Consumers Greatly Exceeds MC of ProductionValue of Additional Output to Consumers Greatly Exceeds MC of Production
10 20 30 40 50 60 70 80 90 10000
10
20
30
40
50
PR
ICE
Frin
ge S
uppl
y
Market D
emand
Market D
emand
Residual Demand
Residual M
R
MCDF
Competitive Supply
a
c
d
e f
AllocativeAllocativeWasteWaste
Goetz & McChesney, Antitrust LawDF-48
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