Suppose that Norway (country 1) and Russia (country 2) are the only two natural

Question

Suppose that Norway (country 1) and Russia (country 2) are the only two natural gas exporters to Germany. The inverse demand curve is P= 100-Q, where P is price and Q is the total quantity in the market. Costs are C1=Q12 and C2=10*Q2, where C1 and C2 are the total costs for Norway and Russia, respectively. Suppose Norway and Russia compete on quantity (Cournot Duopoly). What are the market price and quantity in Germany? How much does each country sell in Germany?

Suppose that Algeria (country 1) and Russia (country 2) are the only two natural gas exporters to French. The inverse demand curve is P= 100-Q, where P is price and Q is the total quantity in the market. Costs are C1=20*Q1 and C2=10*Q2, where C1 and C2 are the total costs for Algeria and Russia, respectively. Suppose Algeria and Russia compete on price (Bertrand Duopoly). What are the market price and quantity in French? How much does each country sell in French?

Explanation / Answer

The Stackleberg model can be described as the leader - follower model where the leader firm picks its own output level and then the other firms are free to choose their optimal quantities based on a downward sloping demand given their knowledge of the leader's output. In short, in the Stackleberg model, firms set output and one firm acts before the others.

In a dominant firm model, one firm, usually with lower cost and a large market, is a price setter and faces many smaller, price-taking firms (high cost). The dominant firms effectively set the price and the price taking firms, called fringe firms, base their production on price not on the output of the dominant firms or the demand curve. Each fringe firm has a small share of the market, though collectively they may have a substantial share of the market.

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