Six per page Week 12 Part II ECON 2101 S1 2010

Six per page Week 12 Part II ECON 2101 S1 2010 - The Order...

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1 Oligopoly Stackelberg Games Bertrand competition The Order of Play ± So far it has been assumed that firms choose their output levels simultaneously. ± The competition between the firms is then a simultaneous play game in which the output levels are the strategic variables. WEEK 12 Part II ECON2101 S1 2010 2 The Order of Play ± What if firm 1 chooses its output level first and then firm 2 responds to this choice? ± Firm 1 is then a leader Firm 2 is a Firm 1 is then a leader. Firm 2 is a follower. ± The competition is a sequential game The competition is a sequential game in which the output levels are the strategic variables. WEEK 12 Part II ECON2101 S1 2010 3 The Order of Play ± Such games are von Stackelberg games. ± Is it better to be the leader? ± Or is it better to be the follower? WEEK 12 Part II ECON2101 S1 2010 4 Stackelberg Games ± Q: What is the best response that follower firm 2 can make to the choice y 1 already made by the leader, firm 1? ± A: Choose according to the reaction function. That is, choose y 2 = R 2 (y 1 ). ± Firm 1 knows this and so perfectly anticipates firm 2’s reaction to any y 1 chosen by firm 1.
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Six per page Week 12 Part II ECON 2101 S1 2010 - The Order...

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