Question

This problem considers the Stackelberg model. Suppose that two firms produce a homogeneous good with constant marginal costs equal to zero. Firms choose their quantities, but instead of setting quantities simultaneously as in the Cournot model, they make their choices sequentially. Firm 1 chooses its quantity first, followed by firm 2. Demand is given by P(q) = a − q. Solve for the subgame perfect equilibrium of this game. Compute equilibrium profits. Is it better to be the leader (the first to move) or the follower (the second to move)?

          This problem considers the Stackelberg model. Suppose that two firms produce a homogeneous good with constant
marginal costs equal to zero. Firms choose their quantities, but instead of setting quantities simultaneously as in the
Cournot model, they make their choices sequentially. Firm 1 chooses its quantity first, followed by firm 2. Demand
is given by P(q) = a − q. Solve for the subgame perfect equilibrium of this game. Compute equilibrium profits. Is it
better to be the leader (the first to move) or the follower (the second to move)?

Added by Lisa S.

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