When firm 1 acts as a Stackelberg leader:
A) Firm 2 produces the monopoly output.
B) Firm 1's profit is less than its profit if they compete in a Cournot fashion.
C) Firm 2 will earn more than if they compete in a Cournot fashion.
D) None of the preceding answers is correct.

Question

Quizplus · Accepted Answer

In a Stackelberg model, the leader firm (Firm 1) takes advantage of being the first mover and produces a quantity that maximizes its profit given the reaction of the follower firm (Firm 2). This typically results in Firm 1 earning a higher profit than in Cournot competition, where firms choose quantities simultaneously. Firm 2, as the follower, adjusts its output based on the leader's decision, often resulting in less profit for Firm 2 compared to Cournot competition. Therefore, options A, B, and C are incorrect.

When Firm 1 Acts as a Stackelberg Leader