Stackelberg -leader/follower game

2 firms choose quantities sequentially

(1) chooses its output; then (2) chooses it output; then the
market clears
This changes the game relative to Cournot competition
- (2) can respond to (1)s output, so that there is no need for a
conjecture
- (1) can anticipate (2)s reaction when it chooses its output
Subgame perfect equilibrium is typically used in this setting
- start at the end of the game and work backwards
- Since firm (1) moves first, take q1 as given, find (2)s best
response q2
- then back-up
and
Max
q q c(1)s
a consider
q choice q1
q2

Firm (2):

q2

a c q1
2

q1 is known; it is not a conjecture

Stackelberg first subgame

Firm (1) solves a different problem, since it knows how (2) will
react to its choice.

a c q1
Max 1 a q1 q2 c q1 a c q1
q1
q1
2

1
= a c q1 q1
2
a c
a c
a c
a c
2

q*
then q2*

1
2
2
4

Q* q1 * q2*

Firms produce different quantities:

3 a c
P* a
*
;
4

a c

3 a c

a c
16

Nash Equilibria

Are there NE that yield paths other than a2, a4 ?

a q1 c

s2 q1
2
a q1

1
if q1 q

1 a c
0 q

q1* q

else

This is a non-credible threat but it satisfies NE conditions:

- the strategies are complete contingent plans
- players are best responding on the equilibrium path

1
if (2) plays s2 then (1)'s BR is q

1 then (2)'s BR is
if (1) plays q

a q1 c
2

1 a
SPNE: requires (2) optimize after all q1 's. NE: a continuum of eqm. from 0 q

First-mover advantage
Note: that if we compute the SPNE, the
leader is always better
off than in the simultaneous move case (Cournot competition)
Since (2) best responds, (1) can get at least the simultaneous move
payoff by choosing the Cournot q. There is a first-mover advantage
in any game with strategic substitutes.
Defn: Strategies are strategic substitutes if best response functions
are downward sloping, and strategies are strategic complements if
best response functions are upward sloping.
In games of strategic complements, first movers have a disadvantage

Policy game

Consider a policy game, where we show how politicians can get voters
to spend too much.
A politician proposes a policy change and then a voter decides
whether to accept or reject the proposal. We should think of the
voter as the median voter; the marginal person.
Suppose that the policy proposal involves setting some number:
- possibly a level of expenditure on education, for example
- normalize so that the voters preferred point is 0
- suppose the current level of expenditure is below the voters
preferred point
A strategy for the politician is a number s
status quo

A strategy for the voter is a mapping

sq

s2 : reject, accept

Suppose that the politician has to play a pure strategy, but that the voter

Payoffs
We are assuming that the politicians payoff is increasing in the
expenditure level
- we do not need to be any more precise than that.
- denote the expenditure level by x
Assume that the voter's preferences are U x x 2 (drops off symmetrically)

So x 0 gives the highest utility and as x is further away from 0 the voter is worse off
Look for a SPNE by starting with the voter's BR fn. the status quo is sq U sq sq

The voter will

- reject any policy proposal that gives a lower utility (is further away fro
- accept any policy that has a higher utility
- be indifferent between accepting and rejecting any proposal with the
and therefore might mix
- at sq and -sq any probability of accepting is a best response

The SPNE
reject

accept

accept

sq
accept with prob

reject

reject

sq
accept with prob

if

if
accept
accept with prob
accept with prob

s2 *

x sq,

x sq

x sq, sq
if
if

x sq
x sq

Now back up to the politicians move.

Since the politician wants expenditure to be as high as possible, the
politician will propose the highest level of expenditure that the
voter is willing to accept.
For "the highest level" to exist it must be the case that 1.
If 1 , then the politician will choose an x that is as close as possible to- sq.

U sq 1 U sq U sq for small enough

But for any x sq there is always an x s.t. x x sq

Infinite NE
reject

s1 sq

So the SPNE has

if

x sq

x sq

s2 accept
if x sq, sq
accept with prob if x sq

Note: as in the Stackelberg game, there are an infinite # of NE and an infinite # of NE paths
accept if

s2 x

reject

x x*

x* sq, sq

otherwise

s1 x *

Another set of NE use the voter's indifferece between sq and sq

accept with prob if x sq
otherwise
reject

s2 x

s1 sq