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Unformatted text preview: The 2-Firm 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 i-th individual firm. Sequential Moves In the Stackelberg model, Firm 1the Leaderis able to move first, while Firm 2the Followermoves subsequently. If the Leader is forward-looking, 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