ECON20002 Lecture Notes - Lecture 20: Externality, Competitive Equilibrium, Marginal Cost
27 Jul 2018
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Document Summary
Leader is already in the market and the follower is a new entrant. Stackelberg leader anticipates follower"s behaviour and takes it into account in output decision. Follower responds by choosing q2 by observing q1. Examine sequence of events backwards given q1, the follower wants to maximise profits: In equilibrium = solving for q2 gives the firm 2"s reaction curve. Hence, the followers behaviour is the same as in the simultaneous cournot model. By design, the leader is able to anticipate the follower"s behaviour. Can substitute in firm 2"s reaction curve for q2. First mover advantage leader"s profits are higher than followers. If leader is allowed to move first it will produce q1*= 37. 5. Solve follower"s response from its reaction function (q2*=18. 75) First mover captures as much of the market as they can. Price competition is only meaningful when products are differentiated. Firms try to poach each other"s customers by offering lower prices. Firms compete by setting prices price competition.
