9.4 Exercises

A. Consider the scenario where firm 2 claims it would produce the Cournot level of output (ac)/3 regardless what q1 firm 1 has chosen. If firm 2 can commit to such an output level, then the best choice for firm 2 is also the Cournot output (ac)/3 (because both produce the Cournot output is a Nash equilibrium in the Cournot model!). Thus firm 2 increased its output (from (ac)/4 to (ac)/3) and its profit as well. What is the difficulty that may prevent firm 2 from achieving this outcome?

B. Consider again the Stackelberg model with the following modification. After firm 2 made its choice q2, firm 1 has a chance to adjust its output level q1. Both firms know such a chance exists. If (q 1 ,q 2 ) is the outcome of the Stackelberg model, will firm 1 want to change its output level? Anticipating this, what would be firm 2's choice? What is the final outcome?