small number of competitors - each has more than negligible effect on the market
- possible product differentiation, barrier to entry (patent, technology, economies of scale)
- decisions based on what competitors are doing
- must decide how to react to competitors' actions
- figure out how own actions will affect competitors' reactions
- equilibrium - all firms doing the best they can >> prices/quantities set
- all firms assume that everyone is taking competitors' actions into account
- nash equilibrium - each competitor doing the best based on what its rivals are doing
Stackelberg equilibrium - leader-follower interaction
- 1 firm makes production decisions before all others
- Q = q1 + q2
- follower's decision depends on what the leader does
- q2 = f(q1) >> reaction function
- follower will seek to maximize profits
- profit maximization where derivative of profit equation equal to 0
- revenue2 = p(Q)q2 = p(q1+q2)q2
- derive w/ respect to q2 in order to solve for reaction function
- leader makes decision based on the follower's reaction function
- revenue1 = p(q1+q2)q1 = p[q1+f(q1)]q1
- derive to find best decision for leader in the market
Subject:
Subject X2:
