(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 529

504 PART • Market Structure and Competitive Strategy F IGURE 13.2 PRODUCT CHOICE GAME IN EXTENSIVE FORM Crispy Firm Sweet Firm Crispy Ϫ5, Ϫ5 Sweet 10, 20 Crispy 20, 10 Sweet Ϫ5, Ϫ5 Firm The Advantage of Moving First In §12.2, we explain that the Stackelberg model is an oligopoly model in which one firm sets its output before other firms Recall that in §12.2, we explain that in the Cournot model each firm treats the output of its competitors as fixed, and that all firms simultaneously decide how much to produce In this product-choice game, there is a clear advantage to moving first: By introducing the sweet cereal, Firm leaves Firm little choice but to introduce the crispy one This is much like the first-mover advantage that we saw in the Stackelberg model in Chapter 12 In that model, the firm that moves first can choose a large level of output, thereby giving its competitor little choice but to choose a small level To clarify the nature of this first-mover advantage, it will be useful to review the Stackelberg model and compare it to the Cournot model in which both firms choose their outputs simultaneously As in Chapter 12, we will use the example in which two duopolists face the market demand curve P = 30 - Q where Q is the total production, i.e., Q = Q1 + Q2 As before, we will also assume that both firms have zero marginal cost Recall that the Cournot equilibrium is then Q1 = Q2 = 10, so that P = 10 and each firm earns a profit of 100 Recall also that if the two firms colluded, they would set Q1 = Q2 = 7.5, so that P = 15 and each firm earns a profit of 112.50 Finally, recall from Section 12.3 that in the Stackelberg model, in which Firm moves first, the outcome is Q1 = 15 and Q2 = 7.5, so that P = 7.50 and the firms’ profits are 112.50 and 56.25, respectively These and a few other possible outcomes are summarized in the payoff matrix in Table 13.10 If both firms move simultaneously, the only solution to the game is that both produce 10 and earn 100 In this Cournot equilibrium each firm is doing the best it can given what its competitor is doing If Firm moves first, however, it knows that its decision will constrain Firm 2’s choice Observe from the payoff matrix that if Firm sets Q1 = 7.5, Firm 2’s best response will be TABLE 13.10 CHOOSING OUTPUT Firm 7.5 Firm 7.5 10 15 112.50, 112.50 93.75, 125 56.25, 112.50 10 125, 93.75 15 112.50, 56.25 100, 100 50, 75 75, 50 0,