nm0754: by a dominant firm i will be getting on to that in about ten minutes 
time so if you could have that er handy for then er and i'll assume everybody 
has now returned i hope you might recall that the last time i gave a lecture on 
this which was this was eleven o'clock last Friday i was talking about market 
structure in particular entry conditions and i had got really down to the last 
part of this subheading here a ne-, the new industrial organization approach 
what i want to do this morning is first of all to finish that off and also to 
say something about perfectly contestable markets all under the general heading 
of entry conditions and then to go on as i say in about ten minutes time to a 
very large topic er topic five in the course outline pricing decisions but i'll 
introduce that er when i get there you may recall that what i said at the end 
of the la-, of my last lecture on the new industrial organization approach 
particular to particularly to er towards entry conditions and market 
performance was that they had laid they're essentially gain theories they had 
laid er considerable o-, emphasis on commitment of resources by the incumbent 
firms in relation to new entrants or possible entrants and the credible threats 
to the possible position of any entry that took place that these commitments 
actually made if a firm simply threat-, an incumbent firm simply threatened er 
a potential entrant that it would do a number of things to prevent or frustrate 
its entry and there was not that commitment there then the threat would be 
empty and it would probably be ignored by the potential entrant and they the 
the entry will actually occur to the disadvantage of the incumbent firm i will 
give some examples 
more specific examples of that er as i get into topic er five on pricing but 
for the moment if you simply note that the new industrial organization approach 
put particular emphasis on this notion of commitment and that that commitment 
then offered credible threats to potential entrants my final point about this 
approach under three was that they were or hi-, they continue to be highly 
critical of the Chicago school approach to the a-, analysis of market structure 
and performance in particular this group thinks that the chicag-, the implicit 
model used by the Chicago school is oversimplified implicitly in much of their 
ma-, of the Chicago school's market analysis is the theory of perfect 
competition and the new industrial organization school regards this as highly 
suspect for the purposes for which it's put er by the Chicago school an 
extension to that is that they argue that is the new industrial organization er 
group argue that the Chicago school ignores the er fact that in most real world 
markets information is highly imperfect and that that imperfect information 
either particularly on the part of potential entrants that they would have far 
less information available to them than is available to the incumbent firms 
that imperfect information may make strategies on the part of incumbent firms 
much more plausible than if you are operating or theorizing in a world of 
perfect information if everybody's got perfect information the Chicago school 
argument may make more sense in real world markets that information er is far 
from perfect and er that may therefore make it possible and logical for 
incumbent firms to pursue a number of strategies er to deter or coerce 
potential and actual entrants and again i will refer back to that point when 
i'm talking about various aspects of pricing policies which i'm about to come 
on to so they are highly critical of the Chicago school particularly for its 
oversimplified theoretical approach for their er assumption that there is 
usually something like perfect information and if you drop those assumptions 
then you can come up with quite different conclusions finally on on this er er 
topic of entry conditions i want to mention a theory that i'm sure a number of 
you are already familiar with from other courses the theory of perfectly 
contestable markets note the word contestable not competitive in fact one of 
the points that i will draw to your attention if you're not already aware of it 
is that this theory the new one [cough] comes to the same conclusions as far as 
the performance of the markets are concerned as the perfectly competitive model 
but it has some quite er different er prediction w-, i-, it the the the 
structure of of the markets involved are quite different from those involved in 
the perfectly competitive model perfectly conte-, a perfectly contestable 
market is one where there are zero entry barriers and zero exit costs it's that 
emphasis on zero entry barriers is which is why i particularly thought it 
appropriate to mention it in the present context the notion of zero exit 
barriers implies that the any entrant firm to that market incurs zero sunk 
costs so a firm th-, th-, th-, the theory isn't assuming that a firm doesn't 
actually have to incur production costs if it enters the market but what it is 
[cough] in its perfect form assuming is that an entrant can come in and produce 
without incurring any sunk costs there are zero entry barriers that theory in 
its perfect form has quite dramatic predictions in particular it predicts that 
the properties of a perfectly contestable market will be exactly the same as 
those of a perfectly competitive market however it predicts that those results 
will hold even if you've only have two or three firms operating in the market 
now that of course is quite dramatically different from what you predict from 
the theory of perfect competition the theory of perfectly contestable markets 
is saying that if you have free entry and free exit you will have in 
equilibrium prices equal to marginal costs you will have all firms producing at 
minimum unit costs they will the industry output will be produced at minimum 
cost and they will the market would clear all consumers will be satisfied at a 
price which is equal to marginal cost even if you only have two firms or three 
or four firms in the market now that seems at first glance perhaps counter-
intuitive because one has normally gr-, gr-, grown up with the idea that if you 
have a highly concentrated market that is consisting of only two or three firms 
they will in fact be able to wield considerable market power what is driving 
the whole of that result in perfe-, the the perfectly con-, er testable market 
er theory what it drives the entire result is the free entry and the free exit 
without going into too much detail essentially what er the theory predicts is 
that if the an incumbent firm in such a market tries to raise its price above 
marginal cost an entrant can m-, immediately appear undercut that price so long 
as it's in excess of marginal cost make a profit if the incumbent firm responds 
to that price cut if the incumbent for example drops its own price to marginal 
cost then the new firm having made a profit previously can then leave 
costlessly the knowledge on the part of the incumbent firm that that is the 
case that is if it tries to rise its price or if there are two or three or 
firms incumbent firms if they try t-, try to raise their price it would 
immediately provoke entry and the price will then sink to marginal cost will 
mean that the incumbent firms will be unable to raise their price above er 
marginal cost the significance therefore of the notion of perfectly free entry 
and exit you can see it's i hope it's significant that here was a theory which 
was saying even if you've got very highly concentrated 
oligopolies if these conditions hold then you needn't worry there are there 
are very few policy policies you need adopt towards such industries because 
they will produce a performance which is in line with that of a perfectly 
competitive market the problem with the theory [cough] is well sorry before i 
get on to that let me simply emphasize that the theory first made its 
appearance in the late seventies by the early eighties it had it had already 
been fed in to policy decisions in the United States and by the mid-eighties it 
was having an influence on policy decisions in Britain as well in a white paper 
in the middle of nineteen-eighties for example on the er deregulation of the 
local bus markets the notion of a contestable market was er actually used and 
it was discussed at some length the argument being that these markets were 
contestable and therefore er they would be put in a competitive performance 
notice i there said contestable rather than perfectly contestable the problem 
as it arose in the debate in the uni-, over this in the United States was that 
a number of policy makers were saying well these markets are approximately 
contestable 
therefore there is no need for us to worry particularly in civil aviation 
which the Americans were deregulating at that time a lot of mergers were 
proposed under the influence essentially of this theory of perfectly con-, 
perfect contestability the authorities then said well although this these 
mergers will concentrate the industry or the-, they will concentrate these 
particular parts of the of the market we will not intervene to try to prevent 
these mergers or look at them more closely because we are advised that these 
are contestable markets if you if an entrant i-, if they try to raise their 
price after the merger entrants would come in and drive the price down 
er so it's a relatively recent theory it has an almost im-, er immediate 
impact on policy discussions both in the United States and in Britain and 
elsewhere the notion of contestability has passed very much into the economic 
literature the problem with it all however is that the theory is non-robust i'm 
using that term in its technical sense any scientific theory to be robust has 
to have the following characteristic that if you if the assumptions of the 
theory do not hold completely or perfectly but they hold approximately then for 
a theory to be robust under those circumstances the predictions must only 
change slightly you could say that the theory of perfect competition is a 
robust theory because if the assumptions are not met completely but 
approximately in such a theory the results don't change very much you still get 
prices approximately in line with marginal cost in the theory of perfect 
competition if the assumptions don't hold completely so a robust theory is one 
where if the assumptions don't hold perfectly but approximately the predictions 
don't change very much my er critique or er th-, the critique of others as well 
about the theory of perfect contestability is that if you change the 
assumptions slightly the predictions change dramatically it's very unstable let 
me give you an example of how what i mean by that if fo-, let us say in a 
particular market which a number of people have said is contestable if there 
are inevitable delays between a firm announcing that it's coming into the 
market and it actually managing to produce and if in coming into the market the 
f-, the entrant has to incur some sunk costs they can only be they only need be 
slight sunk costs so if there's a delay a slight delay between saying i will 
come into the market the firm has to build up its capacity there's a delay 
between the announcement and the actual production and also if there are some 
slight exit costs sunk costs incur for the firm has to incur to come into the 
market then the predictions of the the model are dramatically different 
an incumbent firm in such a market can charge the monopoly price or if it's two 
or three firms they can charge near the monopoly price they can charge near the 
monopoly price until the entrant appears they can then immediately drop their 
price to marginal cost the entrant having finally come in to production would 
then make no money in fact it would make a loss it would make a loss equal to 
its sunk costs if the entrant is aware of that it would not come into the 
market so the sequence is this that with slight alterations i-, if the the 
notion of a perfectly contestable market is not met if you make slight changes 
in the assumptions even though the market may be approximately contestable it 
may has a dramatic difference in the prediction because it means that the 
incumbent firms will continually be able to charge something approaching a 
monopoly price entry will not occur because the entrants will say i will have 
to incur slight sunk costs to get into this market and i won't be able to 
recover them and i won't make any money because as soon i appear and produce 
the price will collapse to marginal cost now the emphasis in this theory on 
sunk costs i think is important that's possibly its most important contribution 
i'm really i suppose offering you a warning that whenever you see er 
contestability or contestable markets mentioned in the literature ask yourself 
the question is this a fudge is the person talking about market X as being 
contestable do do they mean that it's approximately contestable in which case 
you need to ask the further question what does 
that actually mean does it mean that the firms are able to charge a near 
monopoly price because as i've indicated the theory is non-robust and er the 
predictions are or can be very dramatically different if you alter the 
assumptions only slightly from the perfect case the reason for emphasizing that 
er is that it has had a very im-, wide impact on the literature i'm sure that 
you've in your microeconomics for example you may well have encountered 
discussions of this as a an abstract theory the the notion of perfect 
contestability works but as soon as you move away from the perfect the the the 
[cough] perfect version of it the predictions go all over the place entry 
conditions therefore are quite crucial in the predictions for market conduct 
and market performance 
what i want to do now is to go on to a very large topic indeed this is topic 
five on page two of the course outline pricing decisions and it is a very large 
topic and i want to [cough] deal with it under two main headings i'm assuming 
that you have a pretty good knowledge of let us say the theory of simple 
monopoly the theory of perfect competition i'm going to be dealing with 
essentially with two forms of imperfect competition and i'm going to divide 
that up essentially into a market structure which i will characterize as being 
a structure with one dominant firm and i'll say a word in a moment about what i 
mean with by dominance as opposed to monopoly there are var-, a number of 
variations on the theme of pricing in dominant markets which i've listed here 
all of this incidentally will take me quite a long while to get through so 
there's no need to make a note of all of it now i think perhaps if you went 
down to there for the moment that would cover what i'm going to say this 
morning er so the first market structure concerns not monopoly but something 
approaching that er a market structure with a dominant firm the second one w-, 
the second group of er markets that i want to talk about which is not on this 
er slide but which will be on another one is oligopoly which you're a-, 
familiar with i'm sure from microeconomics in a general way i will make er that 
much more precise when i come on to it but it forms the second group of topics 
within this general under this general heading of pricing decisions which if 
you look at the course outline gives under the subheading two pricing problems 
in oligopoly what do i then mean by the di-, or making the distinction between 
dominance and monopoly we all know what a monopoly is that it's a 
single firm case where the firm is in sole control of a market and it's 
protected by such high entry barriers that its position is er not vulnerable to 
competition and the f-, and we can then analyse i-, from the simple theory of 
monopoly what the predictions about price and output will be as i've said in 
some contexts er already er it's very rare in the real world for firms to be in 
that happy position of being a complete monopoly in the real world you very 
often however have an approximation to dominance er for example seem to have 
lost my example at the moment oh here we are i undertook a study in the middle 
eighties from er a large number of monopolies as it was then called the 
monopolies and mergers commission and i was quite it was quite easy for me to 
find twenty-two markets this er the the period covered was the middle seventies 
to the middle eighties it was quite easy to find a number of markets that they 
had investigated where the first firm had a share of fifty per cent or above in 
some cases it was much higher than that it was sort of eighty or ninety per 
cent and the second largest firm or firms were were more than ha-, were only 
half or less of the size in terms of market share of the dominant firm so 
although in many cases er in the real world you don't have monopoly you only 
have those usually in the case of natural 
monopoly the notion of dominance as i want to use it is quite frequent you do 
frequently find one firm with a very sizeable market share as a rule of thumb 
if you like upwards of fifty per cent of the market possibly much higher than 
that and where the second largest firm is much smaller with a a share of 
perhaps under ten per cent or a number of firms all of whom have quite small er 
market shares now my er i will therefore mean by dominance that sort of market 
structure the size distribution of firms is highly skewed you've got one firm 
in pretty much in command of the market but a number of other firms operating 
in the market in competition that market structure can be modelled by the 
dominant firm and the competitive fringe case an example of which i have given 
round as a diagram and which i want to say something er about now the essential 
questions that i want to address in talking about this model are the following 
and this is exactly the diagram that you should have in front of you the sort 
of questions i want to address are these to what extent is a firm in this 
dominant position to what extent is it constrained in its pricing behaviour by 
the presence of the the smaller fringe of firms and what strategies does it 
have for trying to control 
that fringe to its own advantage right well this diagram which may at first 
glance look extremely complicated does or can be broken down into s-, i hope 
some fairly straightforward components we start out with the line M-D which 
stands for market demand the related marginal revenue curve or line is denoted 
M-R the l-, the horizontal line M-C-D is the marginal costs of the dominant 
firm so you've got a market demand curve its related marginal revenue curve 
treating or on the assumption for the moment that we have a monopoly our 
dominant firm's marginal costs are horizontal a-, at er M-C but they are made 
horizontal for to make the diagram rather simpler than it would be if we had a 
curve doesn't actually affect the result now let's start with the position 
let's suppose that this is not a dominant firm it's a monopoly if it was to 
charge a simple monopoly price then on well known principles it would seek out 
this equality here between marginal revenue and marginal cost and the monopoly 
price is P-M and as a monopolist it would charge Q-M for that output 
now that's if you like the starting point remember on-, one of the questions i 
wanted to pose of this model is well how is the behaviour of such a firm 
constrained by the presence of a fringe small much smaller competitors we've 
now got a line er an upward sloping line marked S-F which s-, stands for the 
supply by small fringe firms 
that is upward sloping for normal supply reasons that is if the price is higher 
it th-, th-, th-, the price that the output can command is higher more will be 
supri-, supplied we can note as well that if we look at the point P-zero or P-O 
on the vertical axis at a price below that the fringe doesn't supply anything 
at all in other words the fringe fringe's costs are higher than the costs of 
the dominant firm by assumption at a price P-zero or below they will supply 
nothing let's look at a pr-, at er the the equivalent point on the demand curve 
opposite P-F
in this diagram which i'm showing by the position of my pencil at the moment we 
trace that through onto the demand curve if the price rose to P-F the 
implications from basic analysis is that the fringe at that price would be 
supplying the whole output the whole market it would be supplying enough to 
clear the market at the price P-F for our purposes therefore the relevant price 
range is P-F P-0 over that range the fringe supplies part or all in the limit 
of the market and it's upward sloping as i've indicated because the pri-, the 
higher the price the more will be supplied we make the further assumption now 
given this structure that we if we had our dominant firm with the fringe the 
dominant firm makes the price it optimizes given the presence of that fringe 
the fringe suppliers because they're so small by assumption simply take that as 
a para-, parametric price they can't affor-, er can't er affect it they will 
simply supply according to that er as if you if you 
like as a fixed market price depending on what price has been fixed by the 
dominant firm now what how therefore does under those assumptions and this er 
market structure how does the dominant firm determine its price and output well 
the line that i have marked in this diagram as R-D which is this line here this 
is that stands for residual demand and it is simply the market demand minus 
whatever amount at the price specified is supplied by the fringe suppliers the 
line R-D is residual demand we are taking away from the market demand the 
amount supplied by the fringe suppliers to leave us with a residual demand R-D 
that is the demand given the presence of the fringe that is the demand on which 
the dominant firm optimizes related to that curve or line R-D is the residual 
marginal revenue curve M-R-R in the diagram so we've got the dominant firm 
taking account of the fringe suppliers it goes through or in in er in principle 
it goes through the mental process of 
actual subtracting from the market demand what the fringe will supply and then 
optimizes er on that residual demand curve we can then proceed to see what the 
the dominant firm does this is still its marginal cost this is now its marginal 
revenue so the relevant intersection is this point here on the residual demand 
curve that implies because it's directly above the intersection of marginal 
cost and marginal revenue that implies a price of P-R the dominant firm is 
optimizing given its marginal cost and given its relevant marginal revenue 
which is M-R-R the relevant intersection is at this point here reading off from 
the demand curve the optimizing for the monopolies the optimizing price is P-R 
you may well say well the market won't the whole market won't clear at that 
price because if this firm is only supplying Q-R at that which it would do the 
dominant firm is only supplying Q-R at that price an amount Q-S is demanded 
well of course the gap this dashed line 
here the gap is filled by the fringe they account for an amount of the supply Q-
R-Q-S and the market will clear at the price P-R so what we've got is the 
dominant firm producing Q-R optimizing its position i-, its position given the 
constraint offered by the fringe suppliers the fringe suppliers will take that 
market that that price has given they're not going to try to effect it because 
they're too small in relation to the total they supply Q-R-Q-S what we can note 
about this is compared with the simple monopoly case where we had a price of P-
M and an output Q-M the price because of the presence of apparently 
insignificant small firms the price is quite different the price has dropped to 
P-R and the amount supplied by the fringe is is as i've indicated so the price 
is quite amoun-, an amount lower as a result of the presence of the fringe and 
of course the amount sold is lower consumers therefore undoubtedly benefit from 
the presence of the fringe even
though they may appear on the face of it to be rather insignificant let me stop 
there for a moment and ask if anybody wants me to go through any of that again 
because i know at er first this is your first look at that it it's quite 
complicated does anybody want me to go through any of it again yes can you 
pinpoint where you would like me to to go through 
sm0755: yeah just one small bit i didn't catch why the range between P-nought 
and P-F i understand the lower range being P-nought but not why the upper range 
should be P-F 
nm0754: well o-, the the upper range er it where the supply curve of the fringe 
cuts the demand curve on basic supply and demand principles the fringe would 
simply be would would sell er well it a-, it it looks as if it's a-, almost 
identical with Q-R but that was an unintentional the fringe would supply the 
entire market demand at a price as high as P-F and the lower level as is as 
you've indicated is simply that as its costs are higher at a price P no-, P- O 
or below it doesn't supply anything a-, they they don't supply anything at all 
yes 
sf0756: just ask what was residual demand is that for 
nm0754: no it's it's the the do-, the er the mental process we assume that the
the dominant firm goes through is this i know roughly what the market demand is 
i know what the fringe will supply i will subtract from the market demand what 
the fringe will supply if i charge this price and then i will optimize on that 
resulting demand cu-, or or residual demand curve 
sf0756: so it's the dominant curve 
nm0754: so it's the des-, dominant firm er residual demand curve it then 
chooses its its optimum price and the fringe will then fill if you like fill 
the gap 
sf0756: rest 
nm0754: yes er now some observations on that model if you like juxtaposing some 
fairly casual empirical observations with the theoretical model one of those is 
this that it's been observed over quite long periods of time that dominant 
firms once they have achieved a position of dominance tend to be around for a 
very long while they their market share may decline er over time and i'm now 
talking about very often decades rather than just a sh-, few months or even a 
couple of years their market share may decline
over quite a long period of time but on the whole there are some spectacular 
exceptions but on the whole dominant firms once they've achieved a position a-, 
as i've been talking about in their market they don't give up their dominance 
very easily some firms er in w-, er in our theoretical terms er in our fringe 
may encroach on the be able to encroach on the position of the dominant firm 
but their ability to do that ap-, apparently from the historical records seems 
to be quite er limited in addition to that we must reckon with the fact that 
the dominant firm may have as long as it can get away with it from a policy 
perspective may have a number of strategies open to it for ensuring that even 
if its market share has declined for a 
little while over a few years it can try to regain that er position er by using 
a number of strategies er the most extreme of those i suppose until quite 
recently was the dominant firm in the British s-, er cement industry where er 
for for a number of er extraneous reasons the market share of this dominant 
firm is known for a very long period indeed throughout er the nineteen-hundreds 
er sorry throughout the from nineteen-hundred to the year about nineteen-eighty 
nineteen-ninety its market share almost remained unchanged what happened was 
that this dominant firm achieved its dominance through er a massive merger in 
just prior to the First World War it had er a very large market share then it 
started declining somewhat what it did was to to o-, over a number of decades 
it simply when that happened it simply acquired its nearest rival now you could 
say well that is now that sort of behaviour is now constrained by er 
competition policy and that would be correct but it seems to have 
been able to get away with that strategy for a quite long while so even though 
the the fringe if you like er in that market was the the the w-, the the amount 
to this er fringe supply curve getting more elastic the fringe would be 
supplying more and more to recover its position in that example the firm simply 
acquired its nearest rival so one way of retrieving its market share was by 
acquisition er [cough] another way of shifting this curve to the dominant 
firm's advantage may be for example if the dominant firm in a sense overbuys a 
crucial input both the dominant firm and the fringe firms may have to sup-, 
have to use certain crucial inputs if the dominant firm deliberately as a piece 
of strategy buys up in any a particular time period more than it knows it's 
going to use for its own output that will tend to push up the price of that 
input and raise the cost not only to the dominant firm but to the fringe firm 
and you may say well why push up its own costs i-, i know 
that the fringe firm's costs are er rising as well but why do that surely as a 
piece of strategy it seems very shortsighted but as far as the dominant firm is 
concerned it can do a rough calculation that if it can impose on the admitted-, 
already higher cost fringe firms greater burdens than itself 'cause as the 
dominant firm it may be more capital intensive and these may be er variable 
costs rather than fixed costs so long as the amount of cost increased that it 
can impose on the fringe are greater than on itself and if it does retrieve its 
market share in so doing that is it therefore generates more revenue it will be 
worthwhile it doing that 
so one way of shifting the fringe supply to its own advantage would be to 
overbuy on a crucial input thus pushing up the price both to itself and to er 
its fringe rivals but so long as its retrieval of its market share generates an 
a-, increase in revenue greater than the increase in cost for it it will be 
worth its while another more er the same sort of strategy might be for the 
dominant firm to try to press through lobbying for a change in the regulations 
for example governing the industry which may have a greater impact on the 
smaller fringe firms than on it as the established dominant firm there are a 
number of ways that it might be able to do that for example if the change 
regulation affects only new entrants rather than established firms their costs 
may be higher or the increase in cost may be 
higher than the increase in costs for the dominant firm a number of strategies 
might be possible therefore for changing the er the position of this fringe 
supply if it's successful what that would mean is that it would be moving up in 
that direction it'd be rising so that at each price the fringe will be able to 
supply less if the dominant firm is successful er in raising both its own and 
costs to the fringe as another piece of strategy it might attempt to shift the 
residual demand curve we talk-, i talked about shifting the fringe supply curve 
what it might also try to do is to shift the residual demand curve it might do 
this and this will depend of cou-, to a s-, er a large extent on the nature of 
the product it might do this by undertaking for example a very heavy er 
advertising campaign to swing demand towards its product away from the products 
of the fringe supply now that what that would do would be to push out the 
residual demand curve meaning that it 
would comm-, not only command a higher price but the dominant firm would supply 
more of the market than previously and again as long as the shift in the demand 
which would generate more revenue for the firm the dominant firm so long as 
that is greater than the increasing cost that it's incurring through in my 
example the advertising it would pay it to er to do that as an alternative to 
that sort of strategy that is in in shifting directly shifting the residual 
demand or the fringe supply much more aggressively the dominant firm and i 
think i'm er i hinted at this a-, in my one of my earlier lectures the dominant 
firm may actually decide to try to exploit much more aggressively the learning 
curve you remember i mentioned that in some industries not by no means all but 
in some industries learning effects are very very important the dominant firm 
may therefore try to move very very rapidly down that learning curve which 
implies that it would charge a very low price now 
in the limit in our theoretical scheme of of the such a market it may actually 
push the price towards or at or near P- 0 in which case the amount of fringe 
supply would be very very small note that by assumption i don't think it's a er 
it's not a very imp-, i think it's very plausible assumption the assumption 
however is that the dominant firm has lower costs to start with if and we'd 
have to change in my learning curve case we'd probably have to ma-, draw a 
different sort of marginal cost curve but if there are important learning 
effects the dominant firm may be able t-, or may er mo-, or try to move very 
rapidly down that learning curve charge a very low price which means that the 
fringe supply er would be the {st}fringe suppliers would be struggling and 
their er market share would be reduced important questions i will leave you 
with because i want to take it up bit later on in a later lecture is this if 
the dominant firm did see it is it in its own interests as 
as charging a price below P-zero or P-O in this diagram if it decided that it 
would be in in its own interests in the short run to price below P- O is that 
predatory is it anti-competitive and i will take up the question of er 
predatory behaviour in a subsequent lecture in more detail and try to address 
that question which for the moment i will leave you with let me sum up then on 
the er outcome of a model of this kind the prices if you have a structural of 
of market where you have a dominant firm and a fringe supply the prices with 
the fringe are lower [cough] than without the fringe and of course the output 
is therefore higher consumers therefore benefit historically it's the second 
point historically dominant firms' shares have tended to erode but that erosion 
is very slow generally even if they can't use mer-, the merger route to reclaim 
their or regain their market share because of competition policy they may be 
able to recover their market share more er subtly if
you like by trying to shift either the fringe supply curve or the residual 
demand curve my final point on that is that in the same study which i referred 
to earlier on this morning er over a quite a long period it varied a little bit 
but it was something of the order of forty or fifty years in a sample of 
nineteen dominant firms defined in the way that i defi-, i mentioned earlier on 
that is the dominant firm had fifty plus share of the market thirteen of those 
shares declined in this thirty to forty year period or remained unchanged 
[cough] within a percentage point or two thirteen of a sample of nineteen 
declined or remained unchanged and six increased in this period so these they 
were already dominant they increased their share the final point [cough] i will 
make on this er from that same study is that in each case even though they 
declined they remained the market leader so i will leave you with two things 
dominant firms take a long while to decline but they re-, tend to re-, 
even if they do decline they retain their dominance or their leading p-, 
position in the market secondly which i will open with er next Friday second 
question if dominant firms remain a-, around a long while and apparently their 
market share only declines fairly gently in addition to the strategies that i 
have already mentioned are there other strategies that they can use to prevent 
their share from eroding from new entry and the question i will address at the 
beginning of next time is precisely that is it logical for example for dominant 
firms to use limit pricing that is to charge a lower price in the short run to 
deter entry in order to maintain a higher profits for themselves in the long 
run and i will stop there