23-Competitive Strategy (II)

23-Competitive - Agenda Course Overview Stackelberg Leadership Strategic Moves Investing in Cost-Reducing R&D Strategic Moves Strategic Complements

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1 Agenda • Course Overview • Stackelberg Leadership • Strategic Moves: Investing in Cost-Reducing R&D • Strategic Moves: Strategic Complements and Substitutes • Strategic Delegation • What To Take Away Microeconomics The Structure of the Course Consumers and Producers Market Interaction Today’s lecture Uncertainty Perfect competition Monopoly and Pricing strategies Competitive Strategy Auctions Information in Markets and Agency Game Theory Introduction to Markets Consumer Theory and Demand Technology and Production
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2 Agenda • Course Overview • Stackelberg Leadership • Strategic Moves: Investing in Cost-Reducing R&D • Strategic Moves: Strategic Complements and Substitutes • Strategic Delegation • What To Take Away Stackelberg leadership Until now we have assumed that firms competed by making simultaneous choices: In Cournot firms choose quantities simultaneously and prices in Bertrand. What would be the impact on competition if one firm could credibly commit to making decisions before its rival (and its rival observes this decision)? Consider a Cournot duopoly in which each firm has the same (constant) marginal cost c and firms compete by choosing quantities. Demand is linear given by Suppose that one firm (say Firm 1) can credibly produce before the other firm (and the other firm sees this level of production). Then the second firm will simply choose his best response to what the first firm actually chose. What will the first firm do then? ) 2 1 ( Q Q b a P
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3 The first firm will realize that his choice will affect the choice of the second firm. In particular they know that the second firm will produce at a level Given this reaction, Firm 1’s Revenue is given by P*Q 1 and Marginal Revenue is Note that now Marginal Revenue is larger than under Cournot: producing more implies that Firm 2 will back-off and thus Firm 1 will lose less customers! The optimal level of production for Firm 1 is By moving first, Firm 1 produces more now: Selling one more unit has a “direct effect” on profits and a “strategic effect” on profits. * 2 1 1 1 () 22 ac Q Q Q b  * 1 1 1 2 1 1 1 1 1 11 1 Re ( ( ( ))) ( ( )) 2 2 v PQ a b Q Q Q Q a b Q Q Q b MR a bQ bQ b 1 1 1 2 a c a c a bQ bQ c Q bb        Stackelberg leadership Stackelberg leadership You can compute profits and see that Firm 1’s profits are actually higher now. This is to be expected: since the equilibrium will be at some point in Firm 2’s reaction curve, Firm 1 can select that point by moving first. Moreover, Firm 2’s profits are lower in this case compared to when quantities are chosen simultaneously. Therefore there is a First Mover Advantage as the follower would see their profits reduced.
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This note was uploaded on 11/30/2010 for the course ECON 251 taught by Professor Tontz during the Fall '10 term at USC.

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23-Competitive - Agenda Course Overview Stackelberg Leadership Strategic Moves Investing in Cost-Reducing R&D Strategic Moves Strategic Complements

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