MGEC41H3 Lecture Notes - Lecture 5: Demand Curve, Oligopoly
24 Sep 2020
School
Department
Course
Professor
Document Summary
Modification of cournot model: changes timing. Cournot: quantity setting, firms chose quantity at the same time: neither firm knows, they guess what the rival does. Stackelberg where firms move sequentially, one firm moves first and second firm responds to firm one"s choice. Firm that moves first has advantage over the second firm and will make significantly higher profits. F1 will anticipate what f2 will do after f1"s choice and choose the quantity that maximizes profit: will accurately estimate f2"s response. Both will respond rationally according to best response function. F2 choice on quantity will be on their best response function in reaction to f1"s choice. F2"s choice will not be on f1"s br function because f1 does not have anything to respond to: f1 does not follow its best response function as they are not reacting to anything. Different from cournot model where the equilibrium will sit on both br functions.
