Imagine that a two-firm duopoly dominates the market for spreadsheet application software for personal computers. Also assume that the firms face a linear market demand curve
P = $1,250 - Q
Where P is price and Q is total output in the market (in thousands) . Thus Q = QA + QB. For simplicity, also assume that both firms produce an identical product, have no fixed costs and marginal cost MCA = MCB = $50. In this circumstance, total revenue for Firm A is
TRA = $1,250QA - QA2 - QAQB
Marginal revenue for Firm A is
MRA = ∂TRA/∂QA = $1,250 - $2QA - QB
Similar total revenue and marginal revenue curves hold for Firm B.
A. Calculate the Stackelberg market equilibrium price-output solutions.
B. How do the Stackelberg equilibrium price-output solutions differ from those suggested by the Cournot model? Why?