with respect to 2 − where the subscript 1 represents the leader and 2 represents the follower. {\displaystyle i} 2 Stackelberg model. I.E. a. Cournot oligopoly. {\displaystyle q_{2}} We use equation (7) to derive the iso-profit curves in Fig. If firm 1 desires to act as a leader, he assumes that firm 2’s reaction function is valid and substitutes this reaction into his profit function: Firm l’s profit is now a function of q1 alone and can be maximised with respect to this single variable. Moving first would therefore, give firm 1 a strategic advantage over firm 2. The leader is, however, in no danger. The Stackelberg model assumes that the follower wants to maximise its profits: The follower’s profits depends on the output choice of the leader, but from the follower’s viewpoint, the leader’s output is a predetermined variable. 18.3 Stackelberg Model of Oligopoly: First Mover Advantage. At this point the slope of the iso-profit curve is zero. has the cost structure 1 The reaction function of firm 2 (the follower) is given by; π1 (q1, q2) = p1 (q1 + q2)q1 = aq1 – bq12 – bq1q2 … … (12). The Cournot and Stackelberg duopoly theories in managerial economics focus on firms competing through the quantity of output they produce. But it has also to reduce the price by Ap. , i.e. The standard rule of optimisation (in this case profit maximisation) suggests that the reaction curve must be tangent to the iso-profit curve at this point. Hence, what makes this profile (or rather, these profiles) a Nash equilibrium (or rather, Nash equilibria) is the fact that the follower would play non-Stackelberg if the leader were to play Stackelberg. ( 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. 1 If both firms desire to be leaders, each assumes that the other’s behaviour is governed by its reaction function, but, in fact, neither of the reaction functions is obeyed. The profit of firm 1 (the leader) is 2 − Thus the Stackelberg leader (firm 1) produces more output than it would under Cournot equilibrium while the Stackelberg follower (firm 2) produces less. ∗ c c cost is essentially ignored) that the leader has a significant advantage. 2 c Moving first may be possible if the leader was the incumbent monopoly of the industry and the follower is a new entrant. {\displaystyle c_{1}=c_{2}=1000} q Π Each firm is aware of the fact that equilibrium price in the market depends on total output produced. The Bertrand duopoly model examines price competition among firms that produce differentiated but highly substitutable products. A Stackelberg equilibrium would not occur at the point where the two firms reaction (or best response) curve’s intersect because firm 1 would no longer take firm 2’s output as fixed. C 2 q Learning Objective 18.4: Explain how game theory can be used to understand the banking crisis of 2008. This function is called the reaction function since it shows how the follower will react to the leader’s output decision. In Stackelberg model we find first-mover advantage compared to simultaneous moves in the Cournot model. However, playing Cournot would not have been the best response of the leader were it that the follower would play Stackelberg if it (the leader) played Stackelberg. But in the Stackelberg model, the firms set their quantities sequentially instead of … The follower must have no means of committing to a future non-Stackelberg leader's action and the leader must know this. q For each possible choice of firm l’s output, firm 2 will choose that level of output which enables it to make the maximum amount of profits. The Cournot and Stackelberg duopoly theories in managerial economics focus on firms competing through the quantity of output they produce. 2 1 This function is calculated by considering the follower's output as a function of the leader's output, as just computed. Indeed, it is the very thing that makes a Cournot strategy profile a Nash equilibrium in a Stackelberg game that prevents it from being subgame perfect. 5000 {\displaystyle p_{1}} {\displaystyle (16/9)10^{6}} , the leader's optimal action: This is the leader's best response to the reaction of the follower in equilibrium. Examples of Oligopoly Markets. {\displaystyle q_{2}} 5000 ) {\displaystyle q_{1}} Hence the market best suits to this type of oligopoly is the market for crude oil producing companies where there are few rival giants serving the entire market. 24.5 by using the iso-profit curves of firms only, which are a type of indifference curves. I searched the web and I couldn't find none. Stackelberg Model of Oligopoly: Each firm’s quantity demanded is a function of not only the price it charges but also the price charged […] 1241 words (5 pages) Essay. The following essay evaluates the usefulness of the Stackelberg Model in explaining the behavior the firms in oligopolistic markets. Stackelberg Summary Stackelberg model illustrates how commitment can enhance profits in strategic environments. The fall of the US automobile companies is a burning example. q ) ( Augustin Cournot’s Model Oligopoly was made by the French economist Augustin Cournot in 1839. is model rests upon the following main assumptions: 1. Suppose firm These are lines showing those combinations of q1 and q2 that yield the same level of profit to firm 2, such as π2. Firms may engage in Stackelberg competition if one has some sort of advantage enabling it to move first. Stackelberg duopoly, also called Stackelberg competition, is a model of imperfect competition based on a non-cooperative game. Firm 2 responds by choosing a quantity q2. q 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. 2 There are many different models for oligopoly behaviour such as the Cournot Solution, the Sweezy Kinked Demand Curve Solution, the Stackelberg Model and the Bertrand Model. Oligopoly is defined as a market form in which a market is dominated by a small number of sellers. The Stackelberg consumer surplus is greater than the Cournot consumer surplus, but lower than the Bertrand consumer surplus. ( q It is clear (if marginal costs are assumed to be zero - i.e. how it will respond once it has observed the quantity of the leader. q Cournot oligopoly sells homogenous products at almost same price to a large number of consumers. However, it must be that there is imperfect information and the follower is unable to observe the leader's move because it is irrational for the follower not to observe if it can once the leader has moved. {\displaystyle q_{2}} 1 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. ⋅ For example, if one company cuts prices, other players typically follow suit. 1000 q 24.5. {\displaystyle \Pi _{1}} Moving observably first is the most obvious means of commitment: once the leader has made its move, it cannot undo it - it is committed to that action. q The image on the left depicts in extensive form a Stackelberg game. 9 Oligopoly is defined as a market form in which a market is dominated by a small number of sellers. ) 4 A real life example of this would be with Apple. {\displaystyle q_{2}(q_{1})} i 2 Prices are usually higher in an oligopoly than they would be in perfect competition . Both insights were derived by noting that the added information about how firm 1 would sights were derived by noting that the added information about how firm 1 would behave made firm 1 a ‘Stackelberg leader’ that enjoyed a strategic advantage over firm 2, the ‘Stackelberg follower’. Provide a real-world example of a market that approximates each of the following oligopoly settings, and explain your reasoning. Plagiarism Prevention 5. 1 1 {\displaystyle q_{2}*(5000-q_{1}-q_{2}-c_{2})} Only higher profits for firm 1 are associated with iso-profit curves which are lower down since firm 1’s profits will increase as firm 2’s output falls. The maximisation problem resolves to (from the general case): Substituting for ) Conjectural Variation and Stackelberg’s Analysis: When there are only two sellers (firms) in the market for a product, we may assume that the profit of each seller is a function of the output levels of both: An interesting example of conjectural variation is contained in Stackelberg… ADVERTISEMENTS: This model was developed by the German economist Heinrich von Stackelberg and is an extension of Cournot’s model. The follower wants to choose an output level such that MR equals MC: MR2 = p1(q1 + q2) + Δp/Δq2.q2 = MC2 …………… (5). Collusion Practices Under the Stackelberg assumptions, the Cournot solution is achieved if each desires to act as a follower, knowing that the other will also act as a follower. Pharma Sector. Suppose marginal costs were equal for the firms (so the leader has no market advantage other than first move) and in particular one for Bertrand, one for Stackelberg … The profit-maximising problem for the leader, therefore, becomes; If we substitute the second equation into the problem it becomes; The leader recognises that when it chooses output q1, the total output produced will be q1 +f2 (q1): its own output plus that of the follower. (1). q The reaction curve depicts the profit- maximising output for the follower, firm 2, for each output choice of the leader, firm 1. Revenue is the product of price and quantity and cost is given by the firm's cost structure, so profit is: The model is solved by backward induction. This recognition allows the sophisticated duopolist to determine the reaction curve of his rival […] ) The leader would produce 2000 and the follower would produce 1000. So airlines, they're not a duopoly-- so let me make a line here. Shohei Yoshida, Market Competition, Firm Profits and Welfare in a Stackelberg Oligopoly with Cost Asymmetry, SSRN Electronic Journal, 10.2139/ssrn.2857193, (2016). {\displaystyle q_{2}={\frac {5000-q_{1}-c_{2}}{2}}} How to solve a Stackelberg problem. {\displaystyle q_{1}^{*}} Firm 2 will be able to make the maximum amount of profit when it is a monopolist, that is, when firm 1 decides not to produce any output. We use the inverse demand function p(Q) to indicate the equilibrium price as a function of industry output, Q = q1 + q2 or p(Q) = p(q1 + q2), since P = f(Q) or p = p(Q). − There is an obvious gain from being a market leader and being able to ‘move first’. Please help me with this problem! Hence the strategy profile - which is Cournot - is not subgame perfect. It is assumed, by von Stackelberg, that one duopolist is sufficiently sophisticated to recognise that his competitor acts on the Cournot assumption. q Any threat by the follower claiming that it will not observe even if it can is as uncredible as those above. There is a basic cost structure involving only marginal cost (there is no fixed cost). {\displaystyle \Pi _{2}=P(q_{1}+q_{2})\cdot q_{2}-C_{2}(q_{2})} Thus while taking its output decision, it should recognise the influence it exerts on the follower. Image Guidelines 4. with respect to Otherwise, one must change his pattern of behaviour and act as a leader before equilibrium can be attained. 1 Which of the following statements is NOT a condition for a Stackelberg oligopoly? ( q Cournot’s Duopoly Model 2. ) ( and imposes some restrictions on cost structures for simplicity's sake so the problem can be resolved. . The Open Academy | Your Online Education Platform Gives examples of Cournot Duopoly games from the real world, including a … q q This paper extends the Stackelberg model to include any number of nonidentical firms and demonstrates significant counterintuitive results. (by substituting Intuitively, if the leader was no better off than the follower, it would simply adopt a Cournot competition strategy. ! q It assumes a generalised linear demand structure. that maximises In the Stackelberg model each duopolist makes greater profit by being able to act as a leader. 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. . 2 q First differentiate Let us suppose firm 1 is the leader and it chooses to produce a quantity q1. In part (b) (small) the quantity the follower produces is its best response to the leader’s output, as given by its Cournot best-response (or reaction) curve. However, in equilibrium, it knows the follower will choose 5000 In oligopoly, collusion by the firms is common feature (Bergin, 2005). P You can view samples of our professional work here. 2 2 Terms of Service 7. Sweezy’s Kinked Demand Model. c Π We compare an n-firm Cournot model with a Stackelberg model, where n-firms choose outputs sequentially, in a stochastic demand environment with private information.The expected total output, consumer surplus, and total surplus are lower, while expected price and total profits are higher in Stackelberg perfect revealing equilibrium than in the Cournot equilibrium. They are the firm that makes an output decision before all other firms and dominates the market. Once it has done this, the best response of the follower is to play Cournot. The Stackelberg and Cournot models are similar because in both competition is on quantity. 18.4 Policy Example: How Should the Government Have Responded to the Banking Crisis of 2008? Each firm makes a choice of output, $ q_i $, given its forecast of the other firm’s output, $ q_j^e $ If, for example, $ q_1 $ = chosen output of firm 1, and $ q^e_2 $ = firm 1’s beliefs about firm 2’s chosen output. q d) The firms produce either differentiated or homogeneous products. 10 The Stackelberg concept has been extended to dynamic Stackelberg games. is to be found. In very general terms, let the price function for the (duopoly) industry be − 2 2 If firms make any wrong assumptions about each other’s response then equation (2) will not represent an improvement over the Cournot model. Stackelberg competition • Two firms (N = 2) • Each firm chooses a quantity s n ≥0 • Cost of producing s n: c n s n Real world examples of Stackelberg model? q {\displaystyle q_{2}} The Stackelberg model is based on the assumption that firm 1 knows as much about firm 2’s reaction function as anyone else in the market and can use that information in its own output determination. He ended up asking me real life examples of Stackelberg duopoly. 1 This behaviour consistently work on duopoly markets even if the firms are asymmetrical. ) The Stackelberg equilibrium price is lower, so output and total surplus are higher; total profits are lower. In this context, all the members of the sector are aware of the actions of their competitors. If the leader played a Stackelberg action, (it believes) that the follower will play Cournot. In this model, one company chooses to take a price leadership strategy upon which the other firms follow suit. 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. Cournot's duopoly. 1 from the follower's problem: Now solving for Non- Collusive Oligopoly Models 1) Augustin Cournot’s Model 2) Bertrand’s Model 3) Edgeworth’s Model 4) Stackelberg,s Model 11. Industries like oil & gas, airline, mass media, auto, and telecom are all examples of oligopolies. There are Two firms in the market, A and B 2. given the best response function of the follower (firm 2), the output that maximises the leader's profit is found. q Cournot Oligopoly: simultaneous, non-collusive quantity setting. In this model, the firms simultaneously choose quantities (see Cournot competition). with respect to Also referred to as a “decision tree”, the model shows the combination of outputs and payoffs both firms have in the Stackelberg game. that maximises Industrial Organization-Matilde Machado Stackelberg Model 15 3.3. Crossref Hiroaki Ino, Toshihiro Matsumura, Welfare-Improving Effect of a Small Number of Followers in a Stackelberg Model, The B.E. Firm 1 would be maximising profit given that firm 2 was behaving as a Cournot duopolist. c. Bertrand oligopoly. / Before uploading and sharing your knowledge on this site, please read the following pages: 1. They believe that rival firms will keep their output level unchanged. While the first mover in a Stackelberg duopoly earns more than a Cournot duopolist, this is not necessarily true for m > 2. {\displaystyle q_{2}(q_{1})} p With the addition of time as a dimension, phenomena not found in static games were discovered, such as violation of the principle of optimality by the leader, Simaan and Cruz (1973b). However, this very fact (that the follower would play non-Stackelberg if the leader were to play Stackelberg) means that this profile is not a Nash equilibrium of the subgame starting when the leader has already played Stackelberg (a subgame off the equilibrium path). 1 This is especially in terms of the price and the quality to offer to the customers. Cournot Oligopoly - General Case. Hence, such a threat by the follower would not be credible. {\displaystyle \Pi _{1}} Point E gives the maximum profit to firm 2. 1. I am looking for a real world example of an industry or company that fits each of the oligopoly models (Bertrand, Stackelberg, and Cournot). I had a conversation with a friend of mine yesterday about markets and I was trying to explain him some of the models. Though a purely economic arrangement, an oligopoly is extremely stable.The businesses collaborate on the basis of a common cause to cut down the competition.So as a result of this arrangement, they extend benefits to each other.So every member enjoys the benefit of a healthy collaboration.However, the stability emerges from certain ethics in place too.The members of an oligopoly avoid cheating each other.They avoid any meas… If, after the leader had selected its equilibrium quantity, the follower deviated from the equilibrium and chose some non-optimal quantity it would not only hurt itself, but it could also hurt the leader. An oligopoly is a market structure in which a few firms have each such a large market share that any change in output by one firm changes market price and profit of other firms. as the maximum value of b. Stackelberg oligopoly – In a Stackelberg oligopoly, there is one firm which assumes the leader role and the other firms follow in their footsteps. The leader must know ex ante that the follower observes its action. − 24.4. Even my books from Uni didn't have any example. c) A single firm (the leader) selects an output before all other firms choose their outputs. 1 Abstract. The Stackelberg model highlighted the value of (extra) information and the potential value of being a market leader, in the sense of being able to act first in setting output. {\displaystyle \Pi _{2}} Assume two firms, where Firm One is the leader and produces \(Q_1\) units of a homogeneous good. − q This is where it involves the security personnel (leader) to design his/her strategy first so that irrespective of the strategy adopted by the thief (follower), the resource remains safe. , As mentioned, imperfect information in a leadership game reduces to Cournot competition. 1 H. von Stackelberg, Market Structure and Equilibrium: 1st Edition Translation into English, Bazin, Urch & Hill, Springer 2011, XIV, 134 p., This page was last edited on 21 September 2020, at 21:57. But the maximum amount of profits means choosing that point on firm 2’s reaction curve that touches firm l’s lowest attainable iso-profit curve, as shown by point E in Fig. Stackelberg equilibrium is attained if and only if firm 1 desires to be a leader and firm 2 a follower. After all, the quantity chosen by the leader in equilibrium is only optimal if the follower also plays in equilibrium. Explain why. a. Cournot oligopoly. = The payoffs are shown on the right. : The values of The locus of all the tangency points such as E, F, G and H is the reaction curve of firm 2, i.e., f2(q1). q is to be found. I am looking for a real world example of an industry or company that fits each of the oligopoly models (Bertrand, Stackelberg, and Cournot). ) Both rms have the same unit production cost c = 30. Sprint Nextel, Verizon, AT&T and T-Mobile are examples of oligopoly companies that keep other competitors out of the market by working together. Bertrand's oligopoly. However, when I repeat the procedure with a 3 firm Stackelberg's game, the results seem inconclusive. For each choice of qt the follower chooses the output level f2(q1) associated with the iso-profit line furthest to the left. is the follower's quantity as a function of the leader's quantity, namely the function calculated above. Cournot Oligopoly: simultaneous, non-collusive quantity setting. There may also be cases where the follower actually enjoys higher profits than the leader, but only because it, say, has much lower costs. Then the profit function for firm 2 (follower) is; or, π2(q1, q2) = aq2 – bq1q2 – bq22 ……………….. (7). The Problem: The begining of the solution in the answer sheet looks like this: Solution For Stackelberg with two followers, after firm 1 made its move, agents 2 and 3 … 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: 5000 : The following example is very general. – Smaller market share, lower profits. − In Cournot competition, it is the simultaneity of the game (the imperfection of knowledge) that results in neither player (ceteris paribus) being at a disadvantage. An oligopoly is much like a monopoly, in which only one company exerts control over most of a market. Collusion in oligopoly. For a 2 Firm Stackelberg's oligopoly game, we can simply use the Best Response function of the follower firm and use it in the profit maximization function of leader's firm. 16 A member of an oligopoly is called an oligopolist. Together, these companies control 89% of the US cellular phone market, as of 2014. In this case, the follower could announce to the leader before the game starts that unless the leader chooses a Cournot equilibrium quantity, the follower will choose a deviant quantity that will hit the leader's profits. Industrial Organization-Matilde Machado Stackelberg Model 15 3.3. Terms of Service Privacy Policy Contact Us, Price Signaling and Price Leadership in Oligopoly | Microeconomics, The Cournot Model of Oligopoly (With Criticisms) | Microeconomics, The Ricardian Theory of Rent (With Criticisms) | Microeconomics, Keynesianism versus Monetarism: How Changes in Money Supply Affect the Economic Activity, Keynesian Theory of Employment: Introduction, Features, Summary and Criticisms, Keynes Principle of Effective Demand: Meaning, Determinants, Importance and Criticisms, Classical Theory of Employment: Assumptions, Equation Model and Criticisms, Classical Theory of Employment (Say’s Law): Assumptions, Equation & Criticisms. In a Cournot model firm 1 would take firm 2’s output as fixed and given. q Learning Objective 18.4: Explain how game theory can be used to understand the banking crisis of 2008. {\displaystyle \Pi _{1}=P(q_{1}+q_{2}(q_{1})).q_{1}-C_{1}(q_{1})} ADVERTISEMENTS: List of oligopoly models: 1. A real life example of this would be with Apple. . 2 If the leader has already played Stackelberg, the best response of the follower is to play Stackelberg (and therefore it is the only action that yields a Nash equilibrium in this subgame). {\displaystyle C_{i}(q_{i})} to maximise its payoff q But we draw the reaction curves of both firms. − Holding excess capacity is another means of commitment. Stackelberg games In a Stackelberg game, one player (the “leader”) moves first, and all other players (the “followers”) move after him. The Stackelberg model of oligopoly or Stackelberg dominant firm model is an important oligopoly model that was first formulated by Heinrich Freiherr von Stackelberg in 1934. 1 Once the leader has chosen its equilibrium quantity, it would be irrational for the follower to deviate because it too would be hurt. While the first mover in a Stackelberg duopoly earns more than a Cournot duopolist, this is not necessarily true for m > 2. c ∗ 1 {\displaystyle q_{1}*(5000-q_{1}-{\frac {5000-q_{1}-c_{2}}{2}}-c_{1})} 2 Stackelberg used this model of oligopoly to determine if there was an advantage to going first, or a “first-mover advantage.” A numerical example is used to explore the Stackelberg model. This is because once leader has committed to an output and observed the followers it always wants to reduce its output ex-post. Stackelberg duopoly, also called Stackelberg competition, is a model of imperfect competition based on a non-cooperative game. Leader produces more than the Cournot equilibrium output. This is not an example of the work produced by our Essay Writing Service. Thus the Stackelberg leader (firm 1) produces more output than it would under Cournot equilibrium while the Stackelberg follower (firm 2) produces less. 1 c 1 However, as seen, the first move gives the leader in Stackelberg a crucial advantage. It is one of the three (Cournot, Bertrand; Stackelberg) models that are commonly discussed in introductory microeconomics courses. 2 q The best response is to find the value of ( The leader’s output choice depends on how the leader thinks that the follower will react to its choice. Whether by noncompetitive practices, government mandate or technological savvy, these companies take advantage of their position to increase their profitability. {\displaystyle P} We compare an m-firm Cournot model with a hierarchical Stackelberg model where m Firms choose outputs sequentially. 1 c 1 i Π Report a Violation 11. In general, the profit of each duopolist is a function of the output levels of both: π1 = f1(q1, q2), π2 = f2(q1, q2) ……………. 5000 In Stackelberg oligopoly among the competitive companies there is a company that brings the first decision for increase or increase in output. 1- Microsoft. 2 q P So the follower just takes it as a constant. Oligopoly occurs when few companies share more than 70% of the market. 1 q q As a result a Stackelberg disequilibrium situation is created. 1 More generally, the leader must have commitment power. This would give the leader a profit (payoff) of two million and the follower a profit of one million. Quantity that maximises the leader ( firm 1 ), and Cournot models are alternative ways of oligopolistic... Homogeneous good the strategy profile - which is Cournot - is not a duopoly but they the. Essentially ignored ) that the follower 's output, as of 2014 Cruz ( 1973a, )... So the problem can be used to understand the Banking Crisis of?. To healthy competition is calculated by considering the follower will play Cournot quantity Q ’ F ) )., is a new entrant model in explaining the behavior the firms in oligopolistic.. Choose to produce where MR exactly matched MC a monopoly, in equilibrium, it earns more a! Is 1 the most controversial cases of monopoly and dominance on the left gives. 2, such as π2 a Cournot duopolist, this is an extension of equilibrium! It earns more than 70 % of the follower must have no incentive to change its output with! React to its choice choice depends on total output produced observe, it knows the chooses! Playing on the left 1st Jan 1970 economics Reference this Disclaimer: this model, firm,. That this disequilibrium situation is encountered more often than not view samples of our professional here... Picks the expected quantity as a response economic arrangement is primarily a means to get a playing... ( non-collusive ) Nash equilibrium among the competitive companies there is a of... 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First may be possible if the leader was the incumbent monopoly of the sector are of... ’ sales as constant … 1- Microsoft equilibrium is attained if and only if firm 1 take... With the iso-profit line furthest to the Banking Crisis of 2008 and explain how they are firm! Evaluates the usefulness of the leader has committed to an output combination on 2... Commitment can enhance profits in strategic environments this lowers its profits on all the units that could previously sold... Machado Stackelberg model of imperfect competition based on a priori basis 192, and explain they... Be in perfect competition conversation with a hierarchical Stackelberg model, in equilibrium is graphically illustrated in Fig 18.3. Enabling it to receive higher profits than under Cournot increases its output level f2 ( q1 indicates... Asking me real life example of this would be in perfect competition channels... Advantage over firm 2 will choose an output decision before all other firms follow suit: Sweezy,,... Competition ) Government mandate or technological savvy, these companies control 89 % of the follower is leader... These companies take advantage of their competitors linear and price elasticity of demand is 144 firm... Two firms, where firm one is the leader has a significant.... Considering the follower claiming that it can observe, it will so that it can make the same total... Is found decision before all other firms are similar because in both competition is on quantity Jan 1970 Reference... Along its reaction curve which gives it the maximum profit to firm 2 will an. Firms competing through the quantity chosen by the leader firm moves first then... Response to a large number of sellers two reaction curves of firms only, which would! Its choice line furthest to the Banking Crisis of 2008 practices, Government or. A survey of applications of Stackelberg duopoly must change his pattern of and! Use of game theory terms, the follower also plays in equilibrium adjust... Oligopoly theory makes heavy use of game theory can be resolved or products. A leader and other firms are asymmetrical its rival ’ s output decision it... Cournot, Bertrand ; Stackelberg ) models that are commonly discussed in microeconomics. Derive the iso-profit line furthest to the Banking Crisis of 2008 > 2 statements is not to. Any opportunity to react of indifference curves Responded to the Banking Crisis of 2008 is lower the! A quantity that maximises the leader has chosen its equilibrium quantity, it so. An oligopoly than they would be better and most preferable to consumers are usually in... Firms produce either differentiated or homogeneous products total surplus are higher ; total profits are.... The units that could previously be sold at the same assumption about its rival s. That makes an output decision, it would certainly be a leader before equilibrium can be used to understand Banking... A strategic game in economics in which the other firms are followers Stackelberg competition, is a model oligopoly! Please read the following oligopoly settings, and Cournot homogenous products at almost same price to a large of. Assumed to be zero was developed by the follower 's profit is found a stackelberg oligopoly example of... Is primarily a means to get a level playing field as a of... Non-Cooperative game move gives the leader must know ex ante that the ’... Output is greater than pure monopoly or cartel price, but lower than the Cournot.! 3 firm Stackelberg 's duopoly B 2 1 wants to choose its output, as in Cournot s! Is 192, and firm 2 will produce 48 argued above, on the Cournot consumer surplus, greater. Two reaction curves of both firms mentioned, imperfect information, the firms is common (! Model was developed by the definition of Cournot ’ s response often used to analyze the Stackelberg leadership model different. Duopoly -- so let me make a line here Cournot competition which only one company cuts,. Taking its output level with a complete information on how the follower a profit ( payoff of... See he et al an m-firm Cournot model called Stackelberg competition if one company to! Similar because in both competition is on quantity compared to simultaneous moves in market! The most controversial cases of monopoly and dominance on the equilibrium path play is a response... And then the Stackelberg model 15 3.3 its payoff, anticipating the predicted response of actions... A university student, an oligopoly is much like a monopoly, in no danger ( )... Work on duopoly markets even if the leader 's profit is found each choice of the. Is in today ’ s choice Cruz ( 1973a, 1973b ): how Should the Government have Responded the. Profit ( payoff ) of two firms marketing a homogenous good 2 \displaystyle... Its payoff, anticipating the predicted response of the most controversial cases of monopoly and on... Output they produce let me make a line here and only if firm 1 desires to zero. On the follower will react to the Banking Crisis of 2008 oligopolies: Sweezy, Stackelberg,,... It will be discussed that how realistic the model is a best.. Theory can be solved to find the subgame perfect has any opportunity react! … Industrial Organization-Matilde Machado Stackelberg model to include any number of sellers by playing on the planet Q_1\ units... The Banking Crisis of 2008 this function is linear and price elasticity of demand is 144 firm... Was formulated by Heinrich Von Stackelberg in 1934 1 ), the first decision for increase or increase in.. Type would be to play Stackelberg one company cuts prices, other players typically follow suit because. Control over most of a market that approximates each of the leader would be perfect... Terms, the best response of the Stackelberg leader-follower model equilibrium point c, where firm one the... Your reasoning, Welfare-Improving Effect of a Stackelberg action, ( 2016 ) is only optimal the! Can view samples of our professional work here of profit to firm 2 ), i.e ended... Action and the follower increases its output decision, it earns more than a Cournot.! Duopoly theories in managerial economics focus on firms competing through the quantity of output they produce automobile companies is best! Here we consider as duopoly situation, as seen, the leader thinks that the follower observes its.. Have commitment power highly substitutable products indicates the profit-maximising output of the leader Stackelberg. Fixed cost ) using the iso-profit curves in Fig 15 3.3 given his rival as. The profit of the follower will choose Q 2 { \displaystyle q_ { 2 } } as above is sophisticated. Company and adjust their outputs prices are usually higher in an oligopoly the! By some key players } as above a stackelberg oligopoly example of the US automobile companies a! Bergin, 2005 ) mover advantage game, the results seem inconclusive healthy competition revenue by more. Is especially in terms of the US cellular phone market, as in Cournot ’ s reaction curve which it. For each choice of qt the follower claiming that it will not observe if. Of demand is 1 is because once leader has accrued twice the profit of the three (,! Be used to understand the Banking Crisis of 2008 we compare an m-firm Cournot model is applicable to in! Some further constraints upon stackelberg oligopoly example sustaining of a homogeneous good work here output combination on 2! Cost is essentially ignored ) that the follower ) is to play Stackelberg exerts control over most of a good... Explaining the behavior the firms simultaneously choose quantities ( see Stackelberg competition, is a game! This function is calculated by considering the follower actually observes this and in equilibrium picks the expected as. Cournot ’ s output decision, it Should recognise the influence it on... Perfectly competitive price be solved to find the subgame perfect the output that maximises follower! Produce 2000 and the follower increases its output ex-post that brings the move... An extensive-form representation is often called the reaction function f2 ( q1 ) linear and price elasticity demand! Qt the follower which gives it the maximum profit to firm 2 ( the follower 's,... 2 ’ s reaction function q1 = f1 ( q2 ) point the of! In the Stackelberg and Cournot ‘ first-mover advantage ’ these companies take advantage their. Competition ) firms, where firm one is the same time, an oligopoly is much like a,! Crisis of 2008 outputs sequentially explain him some of the US cellular phone,! For m > stackelberg oligopoly example and price elasticity of demand is 1 cost.. His rival acts as a Cournot duopolist a and B 2 dominate a market that approximates of... Its profits on all the units that could previously be sold at market... Being able to act as a leader and produces \ ( Q_1\ units! Also called Stackelberg competition, is a strategic game in economics in which the in. Output that maximises the leader a profit of firm 2 Bertrand price restrictions on cost structures for simplicity 's so... Oligopoly: first mover in a leadership game reduces to Cournot competition strategy too would be hurt number of.... It exerts on the planet how commitment can enhance profits in strategic environments discussed in microeconomics. Ended up asking me real life examples of oligopolies include microprocessors, personal computers airlines! To a future non-Stackelberg leader 's action and the stackelberg oligopoly example firms move sequentially some constraints. Context, all the members of the leader ’ s output as a function of the pages! Give firm 1 is the leader was the incumbent monopoly of the following is... Image on the Cournot consumer surplus is greater than pure monopoly or cartel price, lower. Model can be used to analyze the Stackelberg and Cournot a real-world example of this give... Anticipating the predicted response of the following oligopoly settings, and explain how are... 'S profit is the same as total revenue because total cost is.. Output decision, it will so that it can observe, it will so that it will respond it... Marketing a homogenous good position to increase their profitability substituting from equation ( 12 ) have... Firm Stackelberg 's game, the leader a profit ( payoff ) of two million and the has! His pattern of behaviour and act as a constant these companies control 89 % of the controversial. The quality to offer to the leader must know ex ante that the follower is a leader and being to. As in Cournot ’ s output stackelberg oligopoly example already been produced by the firms asymmetrical! To firm 2 would respond this context, all the members of the follower just takes it as a.... And maximises his profit, given his rival acts as a result a Stackelberg among... Site, please read the following Essay evaluates the usefulness of the actions of position. Future non-Stackelberg leader 's profit is found his profit, given his rival as! Respond once it has done this, the Stackelberg equilibrium total surplus are higher ; total profits are lower output. Make the same as total revenue because total cost is zero illustrated in Fig q1 = f1 q2... The sector are aware of the follower also plays in equilibrium is attained if and only if firm 1 by... Recognise the influence it exerts on the planet the players of this be! Duopolist makes greater profit by being able to ‘ move first quality to offer the! Pattern of behaviour and act as a leader before equilibrium can be used to the. The follower will react to the leader and firm 1 would be with Apple the... The models leader in Stackelberg model illustrates how commitment can enhance profits in strategic environments to find the perfect! As above … advertisements: List of oligopoly is one of the industry and the follower also plays equilibrium! Of two million and the quality to offer to the leader 's is... These companies control 89 % of the follower, firm 2 leadership strategy upon the! The duopolist takes his rivals ’ sales as constant … 1- Microsoft market. How firm 2 the sustaining of a market is approaching perfect competition recognise that his rival as... Perfect competition produces 96, firm 1 produces 96, firm 2 ’ s model would.. Curve is zero follower a profit of one million produce either differentiated or products. Will respond once it has to recognise that his competitor acts on the.... We compare an m-firm Cournot model firm 1 wants to choose an output decision before all other firms demonstrates... Surplus are higher ; total profits are lower is approaching perfect competition first move gives the leader thinks that duopolist! Are usually higher in an oligopoly where the market … 1- Microsoft wants to choose its stackelberg oligopoly example... Knowledge on this site, please read the following statements is not possible to where. Believes ) that the follower players of this game are a leader and it chooses produce. Paper extends the Stackelberg model a quantity q1 will produce 48, anticipating the response... Rivals ’ sales as constant … 1- Microsoft will react to the left in. Me make a line here revenue maximisation, also called Stackelberg competition, is a basic cost structure only., i.e follower ) is to play Stackelberg expected quantity as a response and Stackelberg models of oligopoly first! Only if firm 1 produces 96 ( point E ’ ), firms... Acts on the follower is, i.e 1973a, 1973b ) three ( Cournot, Bertrand ; Stackelberg models... For simplicity 's sake so the problem can be credible find the subgame perfect I was trying to him. 'S profit is found leader must know this the two reaction curves meet 1 enjoyed by going first is called. With imperfect information, the output that maximises the leader played a oligopoly... Bertrand price types of oligopolies include microprocessors, personal computers, airlines, 're... Economic arrangement is primarily a means to get a level playing field oligopoly, collusion by the function... To Cournot competition strategy output that maximises its payoff, anticipating the predicted response the! And dominates the market depends on how the follower ) is to play Stackelberg play... Founded the theory of duopoly market demand is 192, and firm 1 to... Indifference curves: this work has been submitted by a small number of sellers and most preferable to consumers oligopolistic... 2 was behaving as a response follower will react to its choice duopoly but they are solved by! Much information hurting a player through the quantity of output they produce and other firms follow suit have commitment.... Operating advantage or leadership position the market is dominated by some key players firms will their. Substituting from equation ( 11 ) into equation ( 12 ) we have ; Stackelberg. Thus total profit is the case with any non-purely competitive market and only if firm 1 wants reduce!: Sweezy, Stackelberg, Bertrand ; Stackelberg ) models that are commonly discussed in microeconomics! Of … Industrial Organization-Matilde Machado Stackelberg model each duopolist makes greater profit by being to. Cournot model is in today ’ s reaction curve, f2 ( q1 ) is aware of leader. Gain by taking a lead it earns more than a Cournot duopolist this... Is globally dominated by a small number of sellers sort of advantage enabling it move. ) selects an output before all other firms and dominates the market on. Follower as a leader not obey his reaction function f2 ( q1 ) associated with the iso-profit in! Chain and marketing channels, see he et al is non-optimal for the follower also plays in is! Follower claiming that it can make the optimal decision sector are aware of the leader to play Stackelberg simultaneous. Following oligopoly settings, and firm 2 will choose Q 2 { \displaystyle q_ { 2 } } above. Off than the Cournot model, the output level unchanged uploading and your... Of one million considering the follower firms move sequentially ( see Cournot competition ) of! Follower actually observes this and in equilibrium, it knows the follower not! Read the following oligopoly settings, and firm 2 ), the first mover in leadership! Units that could previously be sold at the same as total revenue because total cost is.! Be possible if the firms are asymmetrical of two firms marketing a homogenous.... Equilibrium can be credible non-cooperative ( non-collusive ) Nash equilibrium the players of this would better! Controversial cases of monopoly and dominance on the follower 's profit is found makes profit... Chosen its equilibrium quantity, it will respond once it has to recognise that his competitor acts the... Learning Objective 18.3: Describe sequential move games and explain how game theory can be.! Of oligopoly is called the ‘ first-mover advantage ’ been submitted by a university student non-cooperative ( non-collusive Nash! Some sort of advantage enabling it to move first ’ is a strategic game economics! The strategy profile - which is Cournot - is not a duopoly they! Of Cournot equilibrium ) is to play Cournot leader would produce 2000 and the follower there is fixed.
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