• How does Stackelberg competition work? Define a Stackelberg leader and a Stack
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Question
• How does Stackelberg competition work? Define a Stackelberg leader and a Stackelberg follower. Describe what a first mover advantage is. • Compare the nature of firm competition: Cournot versus Bertrand. • Compare the nature of firm competition: Cournot versus Stackelberg. • What is a cartel? Is a cartel stable? Discuss why or why not. • How is a monopolistic competition similar to oligopoly? How is it different? • How is a monopolistic competition similar to perfect competition? How is it different? • Define Cournot equilibrium. Define Bertrand equilibrium. • How will Bertrand competition play out when the goods are identical? • Provide an example of industries or goods that follow a Cournot competition. Explain the nature of competition and their best response to each other. Be able to describe what Cournot equilibrium is. • Provide an example of industries or goods that follow a Bertrand competition. Explain the nature of competition and their best response to each other. Be able to describe what Bertrand equilibrium is. • Provide an example of industries or goods that follow a Stackelberg competition. Explain the nature of competition and their best response to each other. Be able to describe what Cournot equilibrium is. • Compare and contrast adverse selection and moral hazard. • Provide examples of adverse selection when seller has more information about the good than the buyer does and discuss how the outcome will be different compared to a market with perfect information. • Provide examples of adverse selection when buyer has more information than the seller and discuss how the outcome will be different compared to a market with perfect information. • Provide three examples (goods/markets) that can exhibit the adverse selection problem and describe how adverse selection arises in each. Specify a solution that has been employed for each good/market. • Provide three examples (goods/markets) that can exhibit the moral hazard problem and describe how moral hazard arises in each. Specify a solution that has been employed for each good/market. • Explain how the insurance market both have an adverse selection and a moral hazard problem?
Explanation / Answer
1) In a Stackelberg competition, the leader firm moves first and the follower firm moves sequentially. The leader gets the first mover advantage and it anticipates the reaction curve of the other firms entering the market and determines its own output. The other firm’s reaction curve is assumed to be based on the first firm’s output.
2) The leader has the first mover advantage and is referred to as the top dog. It chooses its output firsst and is intelligent enough to raise the interdepence of level of output in oligopoly. The follower firm chooses its output after observing leader firm’s output. The leader overproduces to force the follower to scale back its production. This is the first mover advantage which gets firm 1 higher profits.
3) In cournot firms compete in quantity. They simultaneously choose quantities as againts prices in case of Bertrand model.
4) Cournot is a simultaneous game where firms choose quantity simultaneously. Stackelberg is a sequential game where leader moves first and then the followe chooses his quantity. The leader earns more in Stackelberg game than in case of moving simultaneously in cournot.
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