In the simple Cournot model, firms make their output choices simultaneously. In
ID: 1179203 • 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 in the text. The industry demand in this exampe is P= 100 - Q and the MC of each firm is zero.
1. Suppose the each firm must make an upfront investment of $1000 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 $1000 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
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