strategic game theory with two firms , leader and follower .leader produces more than follower

1. WELCOME

2. STACKELBERG DUOPOLY MODEL
ATHIRA.T
1ST M.AECONOMICS
GOVT.COLLEGEMALAPPURAM

3. STACKELBERG DUOPOLY
MODEL
 Strategic Game
 Developed by German Economist Heinrich
Von Stackelberg in 1934
 Extension of Curnot 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. STACKELBERG MODEL

7. FIGURE EXPLANATION
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 XA, firm B will react by producing XB
The sophisticated oligopolist becomes leader, the rival
firm becomes the follower because firm A reaches an
isoprofit curve closer to his axis

8. 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

9. 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.

10. 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…

11. 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.

12. Any Queries?
THANK YOU