An industry has two firms, a leader and a follower. The demand curve for the industry's output is given by p = 456 - 6q, where q is total industry output. Each firm has zero marginal cost. The leader chooses his quantity first, knowing that the follower will observe the leader's choice and choose his quantity to maximize profits, given the quantity produced by the leader. The leader will choose an output of

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Quizplus · Accepted Answer

The leader in a Stackelberg model will choose its output by considering the follower's reaction function. The follower maximizes profit by setting marginal revenue equal to marginal cost (which is zero). Solving for the follower's reaction function and substituting it into the leader's profit maximization problem, the leader's optimal output is found to be 38.

An Industry Has Two Firms, a Leader and a Follower