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Stackelberg duopoly - Stackelberg duopoly The Stackelberg...

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Stackelberg duopoly The Stackelberg duopoly model of duopolies is very similar to the Cournot model. Like the Cournot model, the firms choose the quantities they produce. In the Stackelberg model, however, the firms do not move simultaneously. One firm holds the privilege to choose production quantities before the other. The assumptions underlying the Stackelberg model are as follows: 1. Each firm chooses a quantity to produce. 2. A firm chooses before the other in an observable manner. 3. The model is restricted to a one-stage game. Firms choose their quantities only once. To illustrate the Stackelberg model, let's walk through an example. Assume Firm 1 is the first mover with Firm 2 reacting to Firm 1's decision. We assume a market demand curve of: Q = 90 - P Furthermore, we assume all marginal costs are zero, that is: MC = MC1 = MC2 = 0 We calculate Firm 2's reaction curve in the same way we did for the Cournot Model. Verify that Firm 2's reaction curve is: Q2* = 45 - Q1/2 To calculate Firm 1's optimal quantity, we look at Firm 1's total revenues.
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