In the simple Cournot model, firms make their output choices simultaneously. In
ID: 1157028 • Letter: I
Question
In the simple Cournot model, firms make their output choices simultaneously. In practice, firms sometimes make these kinds of decisions sequentially. Suppose that you manage one of the firms
discussed in the Output Competition example inthe text. The industry demand in this example is
P=100-Q and the MC of each firm is zero.1. Suppose that each firm must make an upfront
investment of $1,000 to enter the market and that your competition has already paid this investment and chosen to produce 50 units. This investment is nonrecoverable (sunk). Should you make the $1,000 investment and enter the market? If so, how much should you produce and what are your profits? Continue to assume that your firm will survive for only one production period.
2. How do your profits and those of your competitor compare to the case of simultaneous decisions discussed in the text? Would you say that this example of output competition has a first mover advantage or disadvantage?
Explanation / Answer
Each of our firms in this oligopoly then has, essentially, two choices to make: (1) how much to
produce and (2) how much to charge. It might be that it