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Stackelberg duopoly
3 key takeaways
Copy link to section- The Stackelberg model demonstrates how a market leader’s actions influence a follower’s decisions in a duopoly.
- The leader firm typically achieves a higher profit by committing to an output level first.
- The follower firm reacts optimally to the leader’s output, determining its own production to maximize profit given the leader’s decision.
What is the Stackelberg duopoly?
Copy link to sectionThe Stackelberg duopoly, named after the German economist Heinrich von Stackelberg, is a model of competition between two firms in an oligopolistic market. This model highlights the asymmetry in decision-making between the firms, with one firm acting as the leader and the other as the follower. The leader firm commits to a production quantity first, and the follower firm then decides its production quantity after observing the leader’s choice.
This sequential decision-making process differentiates the Stackelberg model from the Cournot duopoly model, where firms choose their output levels simultaneously. The Stackelberg model reflects real-world scenarios where one firm has a strategic advantage, such as greater market power or better information, allowing it to move first.
Key components of the Stackelberg duopoly
Copy link to section- Leader: The firm that makes the first move by choosing its output level. This firm has a strategic advantage and can influence the market outcome by committing to its production quantity.
- Follower: The firm that reacts to the leader’s decision. It observes the leader’s output level and then decides its own production quantity to maximize its profit given the leader’s choice.
- Sequential game: The Stackelberg duopoly is a sequential game where the firms move one after the other, unlike simultaneous-move games like Cournot competition.
How does the Stackelberg model work?
Copy link to sectionIn the Stackelberg duopoly, the leader firm determines its profit-maximizing output level first, taking into account the likely response of the follower firm. The follower then chooses its output level based on the leader’s decision. This interaction can be illustrated through the following steps:
- Leader’s decision: The leader firm calculates its optimal output level by considering the follower’s reaction function, which describes how the follower will respond to different output levels chosen by the leader.
- Follower’s response: Given the leader’s chosen output, the follower firm determines its optimal output level to maximize its profit. The follower’s decision is based on the residual demand left after the leader’s output is accounted for.
- Market equilibrium: The market reaches equilibrium when both firms have chosen their output levels, with the leader’s quantity influencing the follower’s decision.
Advantages and implications
Copy link to sectionThe Stackelberg model offers several insights into competitive strategy and market behavior:
- First-mover advantage: The leader firm benefits from a first-mover advantage, as it can commit to an output level that maximizes its profit while influencing the follower’s production decision. This typically results in higher profits for the leader compared to the follower.
- Strategic behavior: The model illustrates how firms can use strategic behavior to influence competitors’ actions and market outcomes. The leader’s ability to anticipate the follower’s response and commit to a production quantity gives it a competitive edge.
- Market dynamics: The Stackelberg model helps explain market dynamics in industries where firms have different levels of market power or information. It shows how leading firms can shape market conditions and outcomes through their strategic decisions.
Example of the Stackelberg duopoly
Copy link to sectionConsider two firms, A (the leader) and B (the follower), producing a homogeneous product. Firm A decides to produce 100 units of the product. Firm B observes this decision and decides to produce 50 units to maximize its profit given Firm A’s output. The combined output of 150 units affects the market price and the profits of both firms, with Firm A typically enjoying higher profits due to its strategic advantage of moving first.
Understanding the Stackelberg duopoly model provides valuable insights into the strategic interactions between firms in a competitive market. By analyzing the sequential decision-making process, economists and business strategists can better predict and influence market behavior. For further exploration, you might look into related topics such as Cournot competition, Bertrand competition, and game theory in economics.
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Sources & references

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