In the Stackelberg model,suppose the first-mover has MR = 15

Question

In the Stackelberg model,suppose the first-mover has MR = 15 - Q₁,the second firm has reaction function Q2 = 15 - Q₁/2,and production occurs at zero marginal cost.Why doesn't the first-mover announce that its production is Q₁ = 30 in order to exclude the second firm from the market (i.e.,Q₂ = 0 in this case)? A)In this case,MR is negative and is less than MC,so the first-mover would be producing less than the optimal quantity. B)In this case,MR is negative and is less than MC,so the first-mover would be producing too much output. C)This is a possible outcome from the Stackelberg duopoly under these conditions. D)We do not have enough information to determine if this is an optimal outcome for this case.

Quizplus · Accepted Answer

If the first-mover sets Q1 = 30, MR becomes negative, which means the firm is producing too much output, leading to losses since MR < MC (which is zero).