Suppose market demand is given by Q = A – p. There are two sellers of the good, each with marginal cost
c.
a) Find the Stackelberg (leader/follower) output equilibrium. How much is sold by each firm?
b) Suppose alternatively the firms make simultaneous price offers. At what price will consumers buy?
c) Now suppose that firms must sink a cost of S if they are to produce. At the first stage they make a
simultaneous choice of whether to sink this cost. If both firms pay this cost, at the second stage they play
the game in b). If only one firm enters at the first stage, at the second stage it sets the monopoly price. In a
pure-strategy equilibrium, what price is charged?
Sample Solution
