IO3 Dynamic Competition

• indentical products
• strategic subsitutability
• P=a-bQ
• Leader (firm 1) sets output first to max profits ancipiating the followers actions.

q1= (1-2)/2b

q2 = (a-c)/4b.

Larger q and profit for leader compared to in Cournot - First mover advantage

• Strategic complements
• Identical prodcuts - contstant undercutting P=MC
• Differentiated products = first mover advantage.

In a two stage stackleberg game - leaders choice if irreversible.

Consider a 3 stage game. Leader can alter decision.

Optimal choice for firm 1 is: q1= 3(a-c)/8b. 

If the leaders move is reversible, the threat is not credible.

Paradox of commitment: it is by limited by own options that I can manage to influence the rivals course of actions in my interest. 

How to commit?

• Quantity- proir repuation, investment in additional capacity, place the stated output on the marker
• Price - "most favoured customer clause", print catalogues.