small number of competitors - each has more than negligible effect on the market  

• possible product differentiation, barrier to entry (patent, technology, economies of scale)
• decisions based on what competitors are doing
  • must decide how to react to competitors' actions
  • figure out how own actions will affect competitors' reactions
• equilibrium - all firms doing the best they can >> prices/quantities set
  • all firms assume that everyone is taking competitors' actions into account
  • nash equilibrium - each competitor doing the best based on what its rivals are doing

Stackelberg equilibrium - leader-follower interaction  

• 1 firm makes production decisions before all others
• Q = q1 + q2
• follower's decision depends on what the leader does
  • q2 = f(q1) >> reaction function
  • follower will seek to maximize profits
• profit maximization where derivative of profit equation equal to 0
  • revenue2 = p(Q)q2 = p(q1+q2)q2
  • derive w/ respect to q2 in order to solve for reaction function
• leader makes decision based on the follower's reaction function
  • revenue1 = p(q1+q2)q1 = p[q1+f(q1)]q1
  • derive to find best decision for leader in the market