Unformatted text preview: .5QB 3/2 QB = 295 QB* = 196.666666 Now, equate (2) and (3) to find QA*... 594 2QA = 296 0.5QA 3/2 QA = 298 QA* = 198.666666 Now, we can find P* using QA* = 198.666666 and QB* = 196.666666 in the demand equation. P* = 600 - QA* - QB* P* = 600 198.666666 196.666666 P* = 204.666666 (2) (3) (4) 289 This allows us to calculate the firm's equilibrium profits... A* = P* QA* - 6 QA* = (204.6666 6) 198.6666 = $39,468.44 B* = P* QB* - 8 QB* = (204.6666 8) 196.6666 = $38,677.77 The point of this example is to show that if a firm, like firm A, has a cost advantage over another firm, like firm B, they will be able to get more of the market in equilibrium (cost advantages create market power in this framework). STACKELBERG QUANTITY COMPETITION The Cournot model has been criticized as somewhat unrealistic in the sense that it is not very likely that the two firms would actually be forced to choose quantity simultaneously. In reality, one firm chooses a production quantity and the other firm would, observing the first firm's decision, follow with a quantity decision of their own. Would this sequential move game result in a different outcome than Cournot competition? The answer is a resounding YES!!! But is it better to go first or to wait, see what the leader chooses and then respond (going second)? The intuitive answer for some people is to wait and go second, since by observing what the leader decides we can gather more useful information with which to make our output decision. However, we will soon see, the first mover (leader) has the advantage. Let's use an example to illustrate, Consider a two-step model. The first step has firm A selecting its output and the second step has firm B observing firm A's decision and then selecting their output accordingly. Let's try to think why firm A will be better off. The only perceived advantage to going second is that firm B can observe what firm A chose before selecting their profit maximizing output. But, firm A can calculate firm B's reaction to their move ahead of time and take it into account. This gives firm A...
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This note was uploaded on 05/25/2010 for the course ECON 301 taught by Professor Sning during the Spring '10 term at University of Warsaw.
- Spring '10