here is the slide 6 and 7

Analysis Moreover, we know that, in equilibrium: pf=c+t(1ab)(1+a;b) p=c+t(1ab)(1+b;a) Now consider firm 1's optimal choice of a in stage 1. Note that: d_r1_ dpfa+ dp30_7r1+8_7f da _ da 8P1 da 8p2 8a Where the envelope theorem tells us that % = 0 when evaluated at pf. One can evaluate the last two terms using the formulas re prod uced a bove. Analysis After some algebra, one obtains: d7r1 * 33+b+1 E__(p1_cll6(1ab)l