Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 10] PRICE AND OUTPUT UNDER MONOPOLISTIC COMPETITION AND OLIGOPOLY 243
10.10 THE MARKET-SHARING CARTEL MODEL
Another type of cartel, somewhat looser than the centralized one, is the market-sharing cartel, in which the
member firms agree upon the share of the market each is to have. Under certain conditions, the market-sharing
cartel can also result in the monopoly solution.
EXAMPLE 7. Suppose that there are only two firms selling a homogeneous commodity and they decide to share the
market equally. If D in Fig. 10-7 is the total market demand curve for the commodity, then d is the half-share curve for
each firm, and mr is the corresponding marginal revenue. If we further assume for simplicity that each firm has the identical
SMC curve shown in the figure, then each duopolist will sell 200 units (given by point E, where mr ¼ SMC) at the price of
$8. Thus, the two firms together will sell the monopoly output of 400 units at the monopoly price of $8 (see Example 6).
However, this monopoly solution depends on the assumption of identical SMC curves for the two firms and on agreement to
share the market equally.
Fig. 10-7
10.11 PRICE LEADERSHIP MODEL
Price leadership is the form of imperfect collusion in which the firms in an oligopolistic industry tacitly
(i.e., without formal agreement) decide to set the same price as the price leader for the industry. The price
leader may be the low-cost firm, or more likely, the dominant or largest firm in the industry. In the latter
case, the dominant firm sets the industry price, allows the other firms in the industry to sell all they want at
that price, and then the dominant firm comes in to fill the market. (For price leadership by the low-cost firm,
see Problems 10.19 and 10.20.)
EXAMPLE 8. In Fig. 10-8, D is the total market demand curve for the homogeneous commodity in an oligopolistic industry,
the P MC s curve is the horizontal summation of the SMC curves of all the (small) firms in the industry other than the
dominant firm itself. Since these small firms behave as perfect competitors (i.e., they can sell all they want at the price set by
the dominant firm), the P MC s curve represents the short-run supply curve for all the small firms together (if we assume that
factor prices remain constant).
The demand curve faced by the dominant firm, d, is then obtained by subtracting horizontally the P MC s from the D
curve, at each possible price. For example, if the dominant firm sets the price of $7, the quantity supplied by all the small
firms together equals the total quantity demanded in the market at that price (point B). Thus we get the price intercept (point
F) on d. At the market price of $6, the total market quantity demanded of 600 units (point C) minus the total quantity of