Why does sequential Cournot have a first mover advantage, and why does sequential Bertrand have a second-mover advantage?
In sequential Cournot competition, the first mover has an advantage due to its ability to set production quantity, which can preemptively influence market prices. On the other hand, in sequential Bertrand competition, the second mover has an advantage because it can strategically undercut the price set by the first mover.
First Mover Advantage in Sequential Cournot Competition
The advantage of the first mover in sequential Cournot competition stems from the sequential nature of the game. In this competition, firms make production decisions one after the other, with the first mover choosing its quantity before the second mover. This allows the first mover to anticipate the response of the second mover and strategically set its production level to influence market prices.
Strategic Quantity Decision: By choosing a higher quantity, the first mover can drive down prices and potentially deter the second mover from entering the market altogether. This results in the first mover gaining a larger market share and higher profits.
Second Mover Advantage in Sequential Bertrand Competition
Sequential Bertrand competition, on the other hand, involves firms setting prices sequentially rather than quantities. The first mover sets its price, and then the second mover observes the price and decides on its own price level. In this scenario, the second mover has an advantage because it can strategically undercut the price set by the first mover.
Price Undercutting Strategy: By setting a lower price, the second mover can attract customers away from the first mover and capture a larger market share. This leads to higher profits for the second mover in sequential Bertrand competition.
The dynamics of these advantages in sequential Cournot and Bertrand competitions highlight the importance of strategic timing and decision-making order in oligopolistic markets. Understanding the nuances of these game structures can help firms develop effective competitive strategies to achieve success in the market.