Stackelberg Model

Topics: Game theory, Economics, Supply and demand / Pages: 7 (1606 words) / Published: Jan 18th, 2013
I- Introduction:

An oligopoly refers to the economic situation where there are several firms in the industry making a product whose price depends on the quantity (Examples can include large firms in computer, chemicals, automobile…)
Cournot was the first economist to explore and explain the oligopolistic competition between the two firms in an oligopolu (Cournot and Fisher in 1897). He underlined the idea of duopoly problem and the non-cooperative behavior of the firms.
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.
The following essay evaluates the usefulness of the Stackelberg Model in explaining the behavior the firms in oligopolistic markets. Furthermore, it will be discussed that how realistic the model is in today’s world though economic diagrams and relevant theories.

II- Stackelberg Model of Oligopoly:

Oligopoly has been addressed through a number of models including Cournot Model, Bertrand Model and Stackelberg Model.
The first one has made a great contribution towards explaining oligopoly as well as non-cooperative game theory. However the remaining two models have made contributions towards overcoming the limitations of the Cournot Model.

The Model basically explains the strategic game in which the market leader makes the first move, and the other follower firms in the oligopoly make sequential moves. The leader firm chooses the quantity first, and based on the leader firm’s quantity, the follower firms set the quantity. Once both quantities are chosen, the price is set to clear the market.
The leader has the first mover advantage on the basis of better technology, higher production capacity, or the exisiting monopoly. Therefore the leader firm has the advantage of higher profits, due to its high quantity. The Stackelberg model has an irreversible nature, that is to say it involves permanent

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