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Stackelberg Equilibrium of the Client and the Producer of Embedded Software

Author

Listed:
  • Vrankić Ilko

    ()

  • Bach Mirjana Pejić

    ()

  • Krpan Mira

    () (Faculty of Economics and Business, University of Zagreb, Croatia)

Abstract

Background: Our research assumes that the software quality affects the product validity. This assumption also refers to embedded software. Objectives: This paper analyses the Stackelberg equilibrium in which the consumer is the leader and the producer of embedded software is the follower. Methods/Approach: A comparative statics analysis of a producer's reaction is carried out and confirms our intuition that the product price is positively correlated to the number of employees and the software quality. Results: An increase in wage has an adverse effect on producer’s reaction. Derived results are illustrated numerically and Stackelberg and cooperative equilibrium are compared. It is shown that the welfare loss is smaller with higher quality software for any number of employees. Conclusions: Although the equilibrium involves less employed workers, the optimal software quality is higher. The optimal product price is lower, which puts the consumer and the producer in a better position

Suggested Citation

  • Vrankić Ilko & Bach Mirjana Pejić & Krpan Mira, 2014. "Stackelberg Equilibrium of the Client and the Producer of Embedded Software," Business Systems Research, Sciendo, vol. 5(1), pages 68-76, March.
  • Handle: RePEc:bit:bsrysr:v:5:y:2014:i:1:p:68-76
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    References listed on IDEAS

    as
    1. Martin J. Osborne & Ariel Rubinstein, 1994. "A Course in Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262650401, March.
    2. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
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