Chapter 14 - Oligopoly and Strategic Behavior Game Theory and Strategic Behavior - Sequential game Sequential game - First mover cannot eliminate a competitor by acting first Market will support both firms Stackelberg duopoly - 2 firms in the industry Both firms move sequentially Leader firm (L) is larger and better established and chooses strategy first Choices: build factory producing 5,000 units/year or 10,000 units/year Follower firm (F) must decide what size factory to build 3 Choices: build 5,000/year, 7,000/year, or 12,000 per year Using game-tree format and backward induction to determine Nash equilibrium Is it possible for leader firm (L) to anticipate what the follower firm (F) will build regardless of what option the leader firm chooses Leader (L) Follower (F) Profits moves first moves second (L, F) Make 7,000 . A (150, 210) Make 5,000 F1 Make 12,000 B (100, 120) Make 5,000 . C (100, 50) Make 10,000 Make 7,000 D (200, 140)