Suppose two duopolists operate at zero marginal cost.The market demand is p = a - bQ.If firm 1 is the Stackelberg leader,what level of output will it choose?

Question

Quizplus · Accepted Answer

In a Stackelberg model with zero marginal cost, the leader maximizes its profit by anticipating the reaction of the follower. The leader's output level is chosen to maximize its profit given the follower's best response. The correct formula for the leader's output in this context is $q_{1} = \frac{a}{2b}$, which accounts for the leader producing a quantity that considers the follower's response to maximize its own profit.

Suppose Two Duopolists Operate at Zero Marginal Cost