The Stackelberg equilibrium price is lower, so output and total surplus are higher; total profits are lower. The Algebra of the Stackelberg Model Since the follower reacts to the leader’s output, the follower’s output is determined by its reaction function The Stackelberg leader uses this reaction function to determine its profit maximizing output level, which simplifies to ( ) 1 2 2 2 1 2b 0.5 Q a c Q r Q − − = = b a c c Q 2 2 2 1 1 + − = Find the equilibrium and outcome of Stackelberg's oligopoly game. The other firm, a leader, takes into account the adjustment which the follower firm will make. The Algebra of the Stackelberg Model § Since the follower reacts to the leader’s output, the follower’s output is determined by its reaction function § The Stackelberg leader uses this reaction function to determine its profit maximizing output level, which simplifies to ( … Both rms have the same unit production cost c = 30. While the first mover in a Stackelberg duopoly earns more than a Cournot duopolist, this is not necessarily true for m > 2. Stackelberg Model of Duopoly Stackelberg Duopoly Suppose that two rms (Firm 1 and Firm 2) face an industry demand P = 150 Q where Q = q 1 + q 2 is the total industry output. An oligopoly consists of a select few companies having significant influence over an industry. 3 Industrial Organization- Matilde Machado Stackelberg Model 5 3.3. Stackelberg duopoly, also called Stackelberg competition, is a model of imperfect competition based on a non-cooperative game. 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: Generally in oligopoly competition, it is assumed that there are a fixed number of firms and no new entry; all firms produce homogenous product in a single period and have constant marginal cost c. In the Cournot model, firms choose the quantities to produce and prices adjusted along to clear the market. The Assumptions of […] List q1,q2,q3. Stackelberg Model ( ) ( ) 2 2 12 2 1 2 2 2 21 2 * 1 221 () FOC: 0 2 0 ( ) Cournot's reaction function 2 q Max P q q c q a b q q c q Although Cournot’s model was based on some unrealistic assump­tions, his method of analysis has been useful for subsequent theoretical development in the areas of duopoly and oligopoly. It was formulated by Heinrich Von Stackelberg in 1934. 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. The answer has been stated as (8,4,2) I understand that we're supposed to use the Best Response functions of the other firms and then move sequentially by first solving the subgame of length 1. ADVERTISEMENTS: The Cournot Model and the Cournot Solution: The first systematic oligopoly model was published by the French economist Antoine Augustin Cournot (1801-77) in 1838. Industries like oil & gas, airline, mass media, auto, and telecom are all examples of oligopolies. The von Stackelberg Leader-Follower Model Heinrich von Stackelberg proposed a model of oligopoly in which one firm, a follower, takes the output of the other firm as given (a Cournot type oligopolist) and adjusts its output accordingly. We compare an m-firm Cournot model with a hierarchical Stackelberg model where m Firms choose outputs sequentially. 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