How can a dominant firm influence the price in a market?

A dominant firm can influence the price in a market by controlling the supply of a product or service.

In more detail, a dominant firm, often being the largest in the market, has the ability to influence the price of a product or service. This is because they have a significant market share and can control the supply of the product or service. By adjusting the quantity of the product or service they produce, they can directly affect the market price.

For instance, if a dominant firm decides to increase production, this will increase the supply of the product or service in the market. If the demand remains constant, this increase in supply will lead to a decrease in the market price. Conversely, if the dominant firm reduces production, this will decrease the supply. If demand remains constant, this decrease in supply will lead to an increase in the market price.

Moreover, a dominant firm can also influence the price by setting a price that other firms in the market have to follow. This is known as price leadership. In this scenario, the dominant firm becomes the price leader and other firms become price takers. They have to accept the price set by the dominant firm because they do not have the market power to influence the price themselves.

Furthermore, a dominant firm can engage in predatory pricing to influence the market price. This involves setting the price very low to drive competitors out of the market. Once the competitors have been eliminated, the dominant firm can then increase the price. This strategy can lead to a temporary decrease in the market price followed by a significant increase.

In conclusion, a dominant firm can influence the price in a market in several ways. They can control the supply of the product or service, set a price that other firms have to follow, or engage in predatory pricing. These strategies allow the dominant firm to manipulate the market price to their advantage.