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Leader with Multiple Price-Taking Followers
- The price taker will set their price equal to the marginal cost of producing the good. Their reaction function is essentially P=MC.
- To find out the level of production of the price setter, plug in the price taker reaction function (P=MC) into the market demand function.
- Find marginal revenue and marginal cost for the price setter, and solve for the quantity produced.
- Next, use the market demand function (with the reaction function of the price taker plugged in) to solve for the price of the product.
- Finally, solve for the quantity of the follower products produced by plugging in the price into the followers reaction function.