Integrating Case Study on Market Structure
In Bayonne, New Jersey, there is a large beauty salon and a number of smaller ones. The total demand function for hair styling per day is Q = 180 - 10P, where P is in dollars. The marginal cost function of all the small salons together is SMCF = 4 + 0.1Q, and the marginal cost function of the dominant or leading salon is MCL = 7 + 0.1Q.
(a) Draw a figure showing DT, SMCF, MCL, DL, MRT, MRL, and the horizontal summation of (SMCF and MCL).
(b) Determine the best level of output and price for hair styling for the leader salon and for the smaller salons if the large salon operates as the price leader. How many stylings will the leader salon supply per day? How many will the smaller salons supply together?
(c) If the large salon forms a centralized cartel, what would be the best level of output per day and price? How much will be supplied by the leader salon and by all smaller salons together if the cartel wants to minimize the total costs of producing the best level of output for the cartel as a whole?
(d) What would be the equilibrium output level and price if the large salon did not exist and the small salons operated as perfect competitors?
(e) What would be the best level of output and price if the large salon did exist in the market and operated as a perfect competitor, just like the small salons?