The following is a simplified duopoly model of competition between two firms. Each firm is restricted...

The following is a simplified duopoly model of competition between two firms. Each firm is restricted to producing 25, 35, 50 or 100 units of output. The details of how the payoffs are derived are unimportant because payoffs are all given in the table below.

FIRM 2

		25	35	50	100
	25	125, 125	100, 140	63, 125	-63, -250
FIRM 1	35	140, 100	105, 105	53, 75	-123, -350
	50	125, 63	75, 53	0, 0	-250, -500
	100	-250, -63	-350, -130	-500, -250	-900, -900

Now assume that FIRM 1 is the Stackelberg leader in this market. And FIRM 2 is the follower. Being the leader, FIRM 1 makes the first move in choosing the quantity of output, followed by FIRM 2. Draw the extensive form or the game tree for this sequential form game.

Using the game tree, now determine the sub-game perfect Nash equilibrium(s). Describe the process that helps you in determining it.

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Expert Solution

Rahul Sunny answered 1 year ago

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