Figure 2: The "Dominant Firm" and a Competitive Fringe

The graph has quantity on the x-axis and price on the y-axis. Overall market demand (D) is a downward sloping line. Supply by fringe firms (S subscript FR) is an upward sloping line; the y-intercept of the supply by fringe firms is less than the y-intercept of overall demand. Marginal cost (MC) is a horizontal line with a y-intercept less than the y-intercept of the supply by fringe firms. Residual demand available to the dominant firm (D subscript RES) is the difference between overall market demand and the supply by fringe firms; its y-intercept occurs at the price where supply by fringe firms intersects overall market demand. Resideual demand is a line that intersections the overall market demand at the price that is the y-intercept of the supply by fringe firms. The marginal revenue derived from the resideual demand is a line with the same y-intercept as the resideual demand available to the dominant firm with twice its slope. The dominant firm chooses to produce the quantity (Q subscript DOM) where marginal cost (MC) is equal to marginal revenue derived from the resideual demand. The price the dominant firm charges (P subscript DOM) is the price the dominant firm can charge according to the residual demand available to the dominant firm if it wants to sell Q subscript DOM. The quantity supplied by the fringe at the price the dominant firm sets is read from its supply curve (S subscript FR) and is denoted Q subscript FR. The total quantity sold in the market (Q subscript TOTAL) is the sum of the dominant firm's quantity (Q subscript DOM) and the fringe's quantity (Q subscript FR) and is the quantity demanded by the overall markelt at price P subscript DOM.

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