What is the dominant firm model in oligopoly?

The dominant firm model in oligopoly is a theoretical framework that explains the behavior and market outcomes when there is a dominant firm in the industry. In this model, there is one large firm, known as the dominant firm, which has a significant market share and sets the price for the entire industry.

The dominant firm model assumes that the dominant firm acts as a price leader, meaning it sets the price and other firms in the industry follow suit. The dominant firm takes into account the reactions of other firms when determining its price and output levels. It considers the potential threat of entry by smaller firms and the possibility of retaliation from existing competitors.

Under the dominant firm model, the dominant firm typically sets a price that maximizes its own profits, taking into account the market demand and cost conditions. Other firms in the industry, known as fringe firms, then adjust their prices and output levels to match the dominant firm's price. Fringe firms are price takers and do not have the ability to influence the market price.

The dominant firm model suggests that the dominant firm can maintain its market power and earn above-normal profits in the long run. This is because the dominant firm's actions, such as setting a low price to deter entry or engaging in predatory pricing, can discourage potential competitors from entering the market. As a result, the dominant firm can enjoy a dominant position and benefit from economies of scale and scope.

However, the dominant firm model also has its limitations. It assumes that the dominant firm has perfect information about the market and the reactions of other firms, which may not be realistic. Additionally, the model does not consider the possibility of collusion or strategic behavior among firms in the industry.

Overall, the dominant firm model provides insights into the behavior and market outcomes in oligopoly when there is a dominant firm. It helps us understand how the dominant firm's actions can influence the market price and the behavior of other firms in the industry.