IO3 Dynamic Competition 0.0 / 5 ? EconomicsStackelberg UniversityAll boards Created by: erisedCreated on: 23-05-18 13:30 Stackelberg 2 firms with identical products p=a-bQ Leader (firm 1) sets output first and firm 2 follows and sets q2. First mover advantage- can antcipate the follower's actions and can therefore manipulate the follower. Finding equillibrium: P=1000-4Q MC1=MC2=20 Anayse the followers decision, it observes q1 and chooses q2 to maximise profits: - Expand the brackets - Find the F.O.C and set equal to q2 - Now analsye firm 1's decision - Sub in q2 1 of 3 Price Competition Products are indentical First mover commits to a price greater than MC The second mover will undercut his price and take the marker Firms continually undercut eachother until P=MC Equilibrium is P=MC Identical to simultaneous game 2 of 3 Commitment If leaders move is reversible, the threat it carriers is not credible and the leader's move loses all commitment power. Paradox of commitment: it is by limiting my own options that I can manage to influence the rival's course of actions in my interest. How to commit? Quantity Competition: proir reputation, investment in additonal capacity, place the stated output on the market... Price Competition: "most-favoured customer clause", print catalogues ... 3 of 3
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