445 Ch 11

445 Ch 11 - Stackelberg equilibrium, the leaders gets a...

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11 Games in which the players take their actions sequentially are dynamic games The question of focus is whether the initial entrant’s advantages are so great that it  would be impossible for any subsequent firm to enter at all.  11.1 Stackelberg Model of Quantity Competition The Stackelberg model is similar to the Cournot model. Both firms choose quantities but  now they so  sequentially  rather than  simultaneously.  In this model, firm 1 will work out firm 2’s best response to each value of q1, incorporate  that best response into its own decision-making and then choose the q1 option which  maximize firm 1’s profit.  The main difference between the  Stackelberg and Cournot Equilibriums  is that in the 
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Unformatted text preview: Stackelberg equilibrium, the leaders gets a larger market share and earns a much larger profit than the follower. Additionally, this outcome occurs even though firm 2 has full information regarding the output choice of q1 In Stackelberg, we derive firm 1s output choice as the profit-maximizing output when firm 1 correctly anticipates that firm 2s decision rule is to choose its best value of q2 conditional upon the output choice already made by firm 1. 11.2 Sequential Price Competition If firms are identical in MC, then the outcome of sequential price setting games is the same as simultaneous price game Prices fall to Marginal Cost....
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This note was uploaded on 02/23/2012 for the course ECON 445 taught by Professor Mcmanus during the Summer '08 term at UNC.

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