Question

1. If firms compete by choosing quantities of output, is there an advantage to moving later or sooner? How might a firm commit to go sooner?

Answer 1

The Stackelberg leadership model is a strategic game in economics in which the leader firm moves first and then the follower firms move behind the leader firm. The parties of the game are a leader and a follower and they try to win over each other in quantity. But the leader must know before hand that the follower is observing his activity. Most importantly to move first the leader must have the commitment power and once he has decided to move first he cannot take back his decision and thus his commitment power comes into action. The leader need to be a binding monopolist and the follower needs to be a entrant who has just entered into the industry. If we talk of commitment then two things are the most important parts of commitment, that is, leading the entrant in the market as well as holding more and more or excess capacity is also an important commitment.

There is always an advantage to moving later or sooner. Likewise when choosing quantities, it is advantageous to move first, and when choosing prices, it is advantageous to wait. In this situation since the main focus is quantity, it is advantageous in moving first.

A firm may commit to go sooner when it is a monopolist as well as it has an advantage over the follower so it prefers to move first when we talk about output.