Answer to Question #144754 in Microeconomics for Pelontle Stephen

Question

Explain the following statement: “When firms choose output quantities, there is a first
mover advantage, and when firms choose prices, there is a second mover advantage”

Answer 1

Solution:

The first part of the statement implies that, when a firm chooses comparatively large output quantities, the other firm will desire to choose a comparatively small quantity and vice versa. In these circumstances, the firm that gets to choose first usually has an advantage in terms of the of the profit amounts they can make and the first to claim how much it will sell.

On the other hand, the second part of the statement suggests that when a firm chooses a comparatively large price, the other firm will also want to choose a comparatively large price and vice versa. In this condition, the firm that chooses to wait as the second mover gains by being able to select a price below that of its competitor and hence make more sales and profits.