Why is the stackelberg equilibrium not chosen

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Reference no: EM13197058

Suppose that firm 1 is a leader and selects output q1 after which firm 2, the follower, observes the choice of q1 and then selects its own output q2. Output is homogeneous across firms and satisfies the industry inverse demand function P = 200 - q1 - q2. Both firms have zero fixed costs and total costs of Ci(qi) = 60qi.

Part a Derive the equation for the follower firm's best response function for the game played using Cournot-Nash strategies. Draw this equation on a diagram with q2 on the vertical axis and q1 on the horizontal axis. Indicate the vertical intercept, horizontal intercept, and slope of the best-response function.

Part b Determine the equilibrium output of each firm in the leaderfollower game. Illustrate graphically that this equilibrium lies on firm 2's best response function. Discuss why this allocation lies on firm 2's best response function. What are firm 1 and 2's profits in the equilibrium?

Part c Now let the two firms choose their outputs simultaneously. Compute the Cournot-Nash equilibrium outputs and industry price. Who loses and who gains when the firms play a Cournot game instead of a Stackelberg game? Why? Why is the Stackelberg equilibrium not chosen in the Cournot game?

Reference no: EM13197058

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