Liam Kearney scored on his return from a broken leg to seal Derry's victory in the league clash at the Brandywell.
Thomas Stewart gave was sent clear before netting a third minute opener and a fine finish from Tam McManus made it 2-0 after 29 minutes.
Dundalk's Alex Williams was sent-off for two yellow cards just before the break while City forward Mark Farren had his penalty saved by Peter Cherrie.
Kearney added an 88th minute third with a cool backpost finish.
Former Linfield midfielder Paul McAreavey made a goal-line clearance for Dundalk in the first half.
Candystripes pair Gareth McGlynn and Ciaran Martyn both hit the woodwork close to half-time.
Farren came on a substitute and his first touch touch was the failed penalty attempt after Kearney was fouled.
Cork City defeated Galway United 4-2 so third-placed Derry stay ahead of the Leesiders on goal difference.
Leaders Bohemians had two men dismissed in their 2-1 home defeat by Bray Wanderers while challengers Shamrock Rovers beat St Pat's Athletic 1-0.
Drogheda United and Sligo Rovers played out a 2-2 draw in Friday night's other game.
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