stackelberg duopoly examples

The large market share can be assumed to be the result of greater scale and thus lower costs. In game theory, a Stackelberg duopoly is a sequential game (not simultaneous as in Cournot’s model). It should be noted that Stackelberg’s model of sophisticated behaviour is not appli­cable in a market in which the firms behave on Bertrand’s assumption. By recognizing the other’s reactions each duopolist can reach a higher level of profit for himself. If firm B is the sophisticated oligopolist, it will choose to produce X’B, corresponding to point b on X’s reaction curve, because this is the largest profit that B can achieve given his isoprofit map and A’s reaction curve. The Nash equilibrium is not Pareto efficient (isoprofit curves, green curves, are not tangent to each other) and therefore, there is a loss in economic efficiency. Firm A, acting as a monopolist (by incorporating B’s reaction curve in his profit-maximizing computations) will produce XA, and firm B will react by producing XB according to its reaction curve. In 1934, Heinrich F. von Stackelberg came up with another model that explains the strategic game through which the firms in an oligopoly decide the level of output in a sequential manner. Under this Cournot Duopoly model, it is assumed that the players would make an arrangement to divide the market into half and then share it. As they attempt to do so they find that their expecta­tions about the rival are not fulfilled and ‘warfare’ will start, unless they decide to come to a collusive agreement. Topic 4: Duopoly: Cournot-Nash Equilibrium. For firm 2 (follower), the problem is similar to the Cournot’ model. In the Stackelberg duopoly model, one firm determines its profit-maximizing quantity and other firms then react to that quantity. With both firms acting in the sophisticated way implied by Stackelberg’s behavioural hypothesis both will want to act as leaders. (2) Duopolist B wants to be leader and A wants to be follower. It is named after Antoine Augustin Cournot (1801–1877) who was inspired by observing competition in a spring water duopoly. He ended up asking me real life examples of Stackelberg duopoly. In this case the market situation becomes unstable. Stackelberg duopoly, also called Stackelberg competition, is a model of imperfect competition based on a non-cooperative game. Then in … We now turn to the situation when there are a small number of firms in the industry and these firms have the option of colluding with or competing with each other. This model was developed by the German economist Heinrich von Stackelberg and is an extension of Cournot’s model. Finally, some remarks are presented in Section 6. Share Your Word File We analyze two different scenarios: The reaction as a function of q1 (blue lines) is as follows: Firm 1 (leader) anticipates the follower’s behaviour and takes it into consideration to make the strategic choice of q1: Therefore, the quantities sold by each firm at equilibrium are: The perfect equilibrium of the game is the Stackelberg equilibrium. In Stackelberg oligopoly among the competitive companies there is a company that brings the first decision for increase or increase in output. (1) Duo­polist A wants to be leader and B wants to be follower. A Duopoly Example. Total production will be greater and prices lower, but player one will be better off than player two, which serves to highlight two things: the importance of accurate market information when defining a strategy, and the interdependence of each player’s strategies, especially when there is a market leader (with the benefit of moving first) and a follower. The sophisticated oligopolist becomes in effect the leader, while the naive rival who acts on the Cournot assumption becomes the follower. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. Share Your PPT File. COURNOT DUOPOLY: an example Let the inverse demand function and the cost function be given by P = 50 − 2Q and C = 10 + 2q respectively, where Q is total industry output and q is the firm’s output. The situation is known as Stackelberg’s disequilibrium and the effect will either be a price war until one of the firms surrenders and agrees to act as follower, or a collusion is reached, with both firms abandoning their naive reaction functions and moving to a point closer to (or on) the Edge-worth contract curve with both of them attaining higher profits. It is named after the German economist Heinrich Freiherr von Stackelberg who published Market Structure and Equilibrium (Marktform und Gleichgewicht) in 1934 which described the model.. It has the following features: Consider an industry with two firms. PC: Cournot price In Section 5, we exerted control on the duopoly Stackelberg game model. Perhaps the best known is the Cournot model. In summary, if only one firm is sophisticated, it will emerge as the leader, and a stable equilibrium will emerge, since the naive firm will act as a follower. Stackelberg duopoly, also called Stackelberg competition, is a model of imperfect competition based on a non-cooperative game. Share Your PDF File B has a higher profit and the naive firm A has a lower profit as compared with the Cournot equilibrium. The dynamics for a duopoly Stackelberg game model with different strategies are analyzed. Two behavioural patterns are possible. Nevertheless, the loss is lower in the Stackelberg duopoly than in Cournot’s. Firm B similarly, calculates its profits as a leader and as a follower: If B is the leader his profits are 918-75, If B acts as the follower his profits are 155-50. PM: monopoly price In this game, the leader has decided not to behave as in the Cournot’s model, however, we cannot ensure that the leader is going to produce more and make more profits than the follower (production will be larger for the firm with lower marginal costs). Clearly firm A will prefer to act as the leader. -Stackelberg’s model is a sequential game, Cournot’s is a simultaneous game; -In Stackelberg duopolies, the quantity sold by the leader is greater than the quantity sold by the follower, while in Cournot duopolies quantity is the same for both firms; -When comparing each firm’s output and prices, we have: -With regard to total output and prices we have the following: QC: total Cournot output Assume that the isoprofit curves and the reaction functions of the duopolists are those depicted in figure 9.20. PPC: perfect competition price The Stackelberg leadership model is a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially. In the Cournot model, firm A simply notes that the market demand is satisfied by the output produced by it and firm B. If both entrepreneurs adopt Stackelberg’s sophisticated pattern of behaviour, each will examine his profits if he acts as a leader and if he acts as a follower, and will adopt the action that will yield him the greatest profit. However, in a Bertrand-type market the sophisticated duopolist can do nothing which would increase his own profit and persuade the other to stop price-cutting. He assumed that the rival acts as his follower and tries to maximizes his profits, given the output decided by the leader. The companies in a duopoly tend to compete against one another, reducing the chance of … One firm, the leader, is perhaps better known or has greater brand equity, and is, therefore, better placed to decide first which quantity q1 to sell, and the other firm, the follower, observes this and decides on its production quantity q2. Before publishing your Articles on this site, please read the following pages: 1. 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