ENG ELC 220 Lecture Notes - Lecture 20: Market Structure, Real Options Valuation, Trigger Strategy
1 Nov 2020
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Document Summary
Microdynamics: the unfolding of competition among a small number of firms over time. Macrodynamics: the evolution of overall market structure. Strategic commitment: a strategic choice that alters the strategic decision of rivals. Stackelberg model: as opposed to the cournot model, in this model two rival companies will not make simultaneous but sequential decisions. The first firm to act (e. g. enter the market) is at advantage as it can compute firm 2"s reaction function. Therefore, it is up to firm 1 to determine market quantities and price in order to maximize its profits. Firm one will be better off and firm 2 will do much, much worse. Conclusion: making an early commitment has a strategic benefit. Strategic substitutes: are given when one firm chooses more of some action (e. g. output or price) and its rival firm cuts back on the same action. Strategic complements: when one firm chooses more of one action and its rival chooses more as well.
