However, Cournot profits here are 1.78 million apiece (strictly, apiece), so the leader has not gained much, but the follower has lost. 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). Hence the strategy profile - which is Cournot - is not subgame perfect. 0000001698 00000 n Oligopoly Definition and Meaning. What is the Stackelberg Model? English thesaurus is mainly derived from The Integral Dictionary (TID). Most English definitions are provided by WordNet . Revenue is the product of price and quantity and cost is given by the firm's cost structure, so profit is: . It is assumed, by von Stackelberg, that one duopolist is sufficiently sophisticated to recognise that his competitor acts on the Cournot assumption. Stackelberg duopoly, also called Stackelberg competition, is a model of imperfect competition based on a non-cooperative game. The Stackelberg price is lower than the pure monopoly or cartel price, but greater than the perfectly competitive price. The leader’s output has already been produced. This is a much more general insight. The Stackelberg and Cournot models are similar because in both competition is on quantity. STACKELBERG DUOPOLY MODEL ATHIRA.T 1ST M.AECONOMICS GOVT.COLLEGEMALAPPURAM 3. The SensagentBox are offered by sensAgent. An oligopoly is an industry dominated by a few large firms. Tips: browse the semantic fields (see From ideas to words) in two languages to learn more. 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). 0000042920 00000 n If the follower chose a much larger quantity than its best response, the market price would lower and the leader's profits would be stung, perhaps below Cournot level profits. So … Cournot competition is an economic model in which competing firms choose a quantity to produce independently and simultaneously, named after … 0000002432 00000 n <]>> Suppose firm i has the cost structure . the strategy profile that serves best each player, given the strategies of the other player and that entails every player playing in a Nash equilibrium in every subgame. For example, an industry with a five-firm concentration ratio of greater than 50% is considered a monopoly. The Stackelberg model can be solved to find the subgame perfect Nash equilibrium or equilibria (SPNE), i.e. An Oligopoly market situation is also called ‘competition among the few’. English Encyclopedia is licensed by Wikipedia (GNU). Ȁх����{hd����q�o��驍. 1228 33 By differentiation, the maximum payoff is given by . 0 The Stackelberg price is lower than the Cournot price, but greater than the Bertrand price. 0000000016 00000 n Hence, the maximum of with respect to is to be found. In this case, the best response of the leader would be to play Stackelberg. Definition 1. Firms have to compete by choosing the amount of output Q1 and Q2 to produce, but one 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. 0000102525 00000 n e����0�q �%ƣ�O��1~g�g� Lectures by Walter Lewin. " �a`*�Ҳ@��e`�bPeXð ��da�c They will make you ♥ Physics. 0000000978 00000 n The Stackelberg leadership model is a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially. Industrial Organization-Matilde Machado Stackelberg Model 11 3.3. 0000004803 00000 n 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. The follower wants to choose to maximise its payoff . This entry is from Wikipedia, the leading user-contributed encyclopedia. To calculate the SPNE, the best response functions of the follower must first be calculated (calculation moves 'backwards' because of backward induction). The leader then picks a quantity that maximises its payoff, anticipating the predicted response of the follower. The demand function is linear and price elasticity of demand is 1. ���Y���a`��������N�w��� �10��- }�� The profit of firm 1 (the leader) is , where is the follower's quantity as a function of the leader's quantity, namely the function calculated above. A duopoly is a form of oligopoly, where only two companies dominate the market. Each firm’s quantity demanded is a function of not only the price it charges but also the price charged […] Oligopoly theory makes heavy use of game theory to model the behavior of oligopolies: Stackelberg's duopoly. All rights reserved. First, differentiate with respect to : The following example is very general. A leader-leader Stackelberg is a situation in the Stackelberg model where both firms believe they are leaders. There may also be cases where the follower actually enjoys higher profits than the leader, but only because it, say, has much lower costs. 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. Our mission. 0000006586 00000 n Our objective is providing unbiased information on concepts in finance to students, investors or anyone who wants to know more about the financial world. The Stackelberg leader is sometimes referred to as the Market Leader. This recognition allows the sophisticated duopolist to determine the reaction curve of his rival […] There is also the important assumption of perfect information in the Stackelberg game: the follower must observe the quantity chosen by the leader, otherwise the game reduces to Cournot. 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. 0000007479 00000 n Stackelberg Model of Duopoly Stackelberg’s Model of Duopoly also has to do with companies trying to decide how much of a homogeneous good to produce. x�b```b``��� Perhaps the best known is the Cournot model. The Cournot and Stackelberg duopoly theories in managerial economics focus on firms competing through the quantity of output they produce. Firms may engage in Stackelberg competition if one has some sort of advantage enabling it to move first. given the best response function of the follower (firm 2), the output that maximises the leader's profit is found. In game theory terms, the players of this game are a leader and a follower and they compete on quantity. On cost structures for simplicity 's sake so the problem can be solved to find the subgame perfect Nash or! 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