(ii) When B is the leader and A the follower, the Stackelberg solution is . In Stackelberg oligopoly among the competitive companies there is a company that brings the first decision for increase or increase in output. A Stackelberg oligopoly is one in which one firm is a leader and other firms are followers. Share Your PDF File I had a conversation with a friend of mine yesterday about markets and I was trying to explain him some of the models. If both firms start recognising their mutual interdependence, each starts worrying about the rival’s profits and the rival’s reactions. Cournot competition is an economic model used to describe an industry structure in which companies compete on the amount of output they will produce, which they decide on independently of each other and at the same time. If firm A is the sophisticated oligopolist, it will assume that its rival will act on the basis of its own reaction curve. Here also the Stackelberg duopolists produce a smaller output (112.5 < 190); sell it at a higher price (43.75 > 5); and the profits of both the sellers are higher (3,172.66, 918.75 > 0, 12.5), and so their combined profit is higher. Emphasis is laid on the number of goods that are produced indicating that this is what would shape the competition between the 2 firms. In a Cournot-type market the sophisticated firm ‘bluffs’ the rival, by producing a level of output larger than the one that would be produced in the Cournot equilibrium and the naive rival, sticking to his Cournot behavioural reaction pattern, will be misled and produce less than in the Cournot equilibrium. Firms are identical and produce an homogenous product. 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. Topic 4: Duopoly: Cournot-Nash Equilibrium. Clearly firm A will prefer to act as the leader. Stackelberg model is a leadership model that allows the firm dominant in the market to set its price first and subsequently, the follower firms optimize their production and price. Industrial Organization-Matilde Machado Stackelberg Model 15 3.3. The principal difierence between the Cournot model and the Stack-elberg model is that instead of moving simultaneously (as in the Cournot model) the flrms now move sequentially. He ended up asking me real life examples of Stackelberg duopoly. Then in … 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. The two firms make simultaneous decisions. It describes the strategic behaviour of industries in which there is a dominant firm or a natural leader and the other firms are the followers. 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. The price in the market depends on the marginal cost of this dominant firm. Equilibrium will be reached either by collusion, or after the ‘weaker’ firm is eliminated or succumbs to the leadership of the other. In the Stackelberg model, we have a single firm that has a significantly large market share. QPC: total perfect competition output Von Stackelberg’s model has interesting implications. Real world examples of Stackelberg model? It is named after Antoine Augustin Cournot (1801–1877) who was inspired by observing competition in a spring water duopoly. We investigate Stackelberg mixed duopoly models where a state-owned public firm maximizing domestic social surplus, and a foreign firm compete. To find the Nash equilibrium of the game we need to use backward induction, as in any sequential game. Both rms have the same unit production cost c = 30. 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. It is treated as the classical solution to the duopoly problem. Stackelberg duopoly, also called Stackelberg competition, is a model of imperfect competition based on a non-cooperative game. Since then, the Li-Du-Massar scheme has been widely applied in Cournot duopoly game [10][11][12][13], Bertrand duopoly game [14][15][16] and Stackelberg duopoly game [17, 18]. In situations (1) and (2) the result is a determinate equilibrium (provided that the first- and second-order conditions for maxima are fulfilled). Two behavioural patterns are possible. Stackelberg duopoly model definition. 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. QS: total Stackelberg output Assume that rst Firm 1 moves and chooses q 1:In the second stage, after observing q 1;Firm 2 moves and chooses q 2: We may now summarise Stackelberg’s model. I.E. For simplicity here we consider as duopoly situation, as in Cournot’s model. It was developed in 1934 by Heinrich Stackelberg in his “Market Structure and Equilibrium” and represented a breaking point in the study of market structure, particularly the analysis of duopolies since it was a model based on different starting assumptions and gave different conclusions to those of the Cournot’s and Bertrand’s duopoly models. The rivals should recognise their interdependence. This model applies where: (a) the firms sell homogeneous products, (b) competition is based on output, and (c) firms choose their output sequentially and not simultaneously. By recognizing the other’s reactions each duopolist can reach a higher level of profit for himself. This model was developed by the German economist Heinrich von Stackelberg and is an extension of Cournot’s model. Otherwise, one of the rivals must alter his be­haviour and act as a leader before equilibrium is attained. 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. PC: Cournot price However, if both firms are sophisticated, then both will want to act as leaders, because this action yields a greater profit to them. The most he can do is to keep his own price constant, that is, behave exactly as his opponent expects him to behave. (1) Duo­polist A wants to be leader and B wants to be follower. In the Cournot model, firm A simply notes that the market demand is satisfied by the output produced by it and firm B. duopoly definition: 1. a situation in which only two companies control all the business in a particular industry: 2…. 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. This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. 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. A Duopoly Example. Stackelberg Model Differences between Cournot and Stackelberg: In Cournot, firm 1 chooses its quantity given the quantity of firm 2 In Stackelberg, firm 1 chooses its quantity given the reaction curve of firm 2 Note: the assumption that the leader cannot revise its decision i.e. With both firms acting in the sophisticated way implied by Stackelberg’s behavioural hypothesis both will want to act as leaders. The duopoly Stackelberg model There are two primary types of duopolies: the Cournot Duopoly (named after Antoine Cournot) and the Bertrand Duopoly (named after Joseph Bertrand). PM: monopoly price B has a higher profit and the naive firm A has a lower profit as compared with the Cournot equilibrium. Assume that the isoprofit curves and the reaction functions of the duopolists are those depicted in figure 9.20. Disclaimer Copyright, Share Your Knowledge Perhaps the best known is the Cournot model. In fact, the earliest duopoly model was developed in 1838 by the French economist Augustin Cournot. In this case the market situation becomes unstable. one for Bertrand, one for Stackelberg … Learn more. The model 2.1. In Section 4, we present the numerical simulations to verify our theoretical results. Stackelberg’s Duopoly Model This is an extension of Cournot’s Model The essence of Stackelberg’s model is the problem of leadership and followership. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. ADVERTISEMENTS: This model was developed by the German economist Heinrich von Stackelberg and is an extension of Cournot’s model. QM: total monopoly output Stackelberg’s Duopoly Model (With Diagram) Article Shared by Trisha. That is, start analyzing the decision of the follower. Content Guidelines 2. Thus, it is not obvious how the entanglement affects the equilibrium outcome prior to computing subgame perfect equilibria of the quantum game. 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. In Section 5, we exerted control on the duopoly Stackelberg game model. 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