L8-oligopoly2

L8-oligopoly2 - The Stackelberg Model In Stackelberg...

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The Stackelberg Model In Stackelberg oligopoly, • We make the same assumptions as for the Cournot model, • EXCEPT that firms do not make simultaneous decisions. • Instead, a leader firm decides its output level first and all other firms, the follower firms , choose their output thereafter. This is called sequential decision-making . Econ 100C 1
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The Stackelberg model with 2 firms Timing: 1. Firm 1 chooses q . 1 2. Firm 2 observes q 1 . 3. Firm 2 chooses q 2 . Firm 1 knows that firm 2 can observe q 1 before making s choice of its choice of q 2 . s a profit- aximizer, firm 2 will choose a value of As a profit maximizer, firm 2 will choose a value of q 2 that is on its best-response function. Econ 100C 2
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The Stackelberg model with 2 firms • Mathematically, the Stackelberg equilibrium can be found by maximizing firm 1’s (the Stackelberg leader’s) profit subject to the constraint that firm 2 chooses a point on its best-response function. • Because the constraint is an equality constraint, this is most easily done by substituting firm 2’s best-response function into firm 1’s profit function. Econ 100C 3
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The Stackelberg model with 2 firms Example: Inverse demand curve: p ( Q ) = a bQ Firm 1’s cost function: C ( q 1 ) = c * q 1 Firm 2’s cost function: C ( q 2 ) = c * q 2 otal output: Total output: Q = q 1 + q 2 Econ 100C 4
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L8-oligopoly2 - The Stackelberg Model In Stackelberg...

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