stackelberg Duopoly model

it is a strategic game with two firms . One firm is acting as a leader and another is a follower

1. WELCOME

2. ATHIRA. T 1 ST M.A ECONOMICS GOVT.COLLEGE MALAPPURAM

3. Strategic Game Developed by German Economist Heinrich V on Stackelberg in 1934 Extension of C urnot model There are two firms, which sell homogenous products It is a sequential game not simultaneous

4. One firm is Leader and another is follower The leader firm moves first and the follower firm move sequentially Leader firm chooses the quantity first, and the follower observes the leader’s quantity and then chooses it’s profit Once the two quantities are chosen ,price is set to clear the market Contd …

5. Contd … By Stackelberg assumption, the duopolist recognize that his competitor acts on the Curnot assumption It allows the sophisticated duopolist to determine the reaction curve of his rival and incorporate it in his own profit function Then he proceeds to maximise like a monopolist.

6. If firm A is the sophisticated oligopolist , it’s rival will act on the basis of it’s own reaction curve A chooses his output at the level which maximises his profit It lies on the lowest possible isoprofit curve of A, denoting the maximum profit with B’s reaction curve Firm A, produce X A, firm B will react by producing X B The sophisticated oligopolist becomes leader, the rival firm becomes the follower because firm A reaches an isoprofit curve closer to his axis

7. Cntd … The naive follower is worse off as compared with curnot equilibrium, the level of output he reaches an isoprofit curve further away from his axis. If firm B is the sophisticated firm , it will choose to produce XB’, corresponding to point B on A’s reaction curve Firm B will the leader and firm A becomes the follower B has a higher profit and firm A has a lower profit as compared with the curnot equilibrium

8. STACKELBERG DISEQUILIBRIUM If both firm are sophisticated, then both will want to act as leaders It yields a greater profit to them but market situation becomes unstable This situation known as Stackelberg Disequilibrium The effect will either be a price war until one of the firm surrenders and agree to act as follower, or a collusion is reached.

9. Both firm abandoning their naive reaction function and Moving to a point closer to the Edgeworth Contract curve with both of them attaining higher profits Contd …

10. Conclusion Stackelberg model is a sequential game, not simultaneous like cournot’s game In stackelberg duopolies the quantity sold by the leader is greater than the quantity sold by the follower, while in curnot duopolies quantity is same for both firms.

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