Let the inverse demand curve be p(Q) = a − bQ. There are two firms with constant marginal costs of c and fixed costs of F1 and F2 which are incurred only if a positive quantity is produced.

Suppose that firm 1 moves first and chooses a quantity q1. In the second stage, the second firm chooses q2 and the market clears.

1. If F2 is really large, what is the equilibrium of this game?

2. Now let F2 belong to some intermediate range. Solve for the level of q1 such that the second firm is indifferent from producing a positive quantity or nothing.

3. Show the condition that checks that the first firm would actually want to produce this amount in order to induce the second firm to stay out of the market

4. Explain why entry deterrence is possible in this model while it is not in regular Stackelberg.