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Unformatted text preview: The 2Firm Stackelberg Market Introduction Suppose two firms each produce a homogeneous product with no costs of production. Let market price be linear in the combined output of both firms in the market and of the form P = a b ( q 1 + q 2 ) , where q i is the output of the ith individual firm. Sequential Moves In the Stackelberg model, Firm 1the Leaderis able to move first, while Firm 2the Followermoves subsequently. If the Leader is forwardlooking, she can anticipate how the Follower will pick his output in response to any prior choice of output she herself makes. Specifically, it is easy to see that if Firm 1 produces output q 1 , then the relation between Firm 2s output, q 2 , and the market price he receives is of the form P = a bq 1 bq 2 . where a bq 1 is constant from Firm 2s perspective 1 . Marginal revenue for Firm 2 is thus of the form MR 2 = ( a bq 1 ) 2 bq 2 ....
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This note was uploaded on 04/26/2010 for the course ECON 101 taught by Professor Staff during the Spring '08 term at Vassar.
 Spring '08
 Staff
 Microeconomics

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