Two large diversified consumer product firms X and Y are

Two large diversified consumer product firms X and Y are about to enter the market for a new chemical agent, with very similar products. The two firms are also similar in strategic
approach and as no other firm is likely to enter the market, it will be a duopoly for the foreseeable future. The market demand for the chemical is given as

P = 12 – 0.00004Q

Prices and quantities are per bottle. Marginal cost is estimated to be a constant $2 per bottle for each firm.

a) If the firms enter the market at the same time a Cournot model is appropriate for analyzing the market. Solve for the profit maximizing output and price using the
Cournot model. (4 marks)

b) Firm X has superior technical expertise that could allow them to enter the market several months before the other. Use the Stackleberg model to analyze the impact on
firm X of being first into the market? (6 marks)