Stackelberg Oligopoly

6 Key excerpts on "Stackelberg Oligopoly"

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  Industrial Organization

  Contemporary Theory and Empirical Applications

  • Lynne Pepall, Dan Richards, George Norman(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  268 Strategic Interaction and Basic Oligopoly Models An interesting additional aspect of the disadvantaged outcome for firm 2 in the Stackelberg model is that this outcome occurs even though firm 2 has full information regarding the output choice of q 1 . Indeed, firm 2 actually observes that choice before selecting q 2 . In the Cournot duopoly model, firm 2 did not have such concrete information. Because the Cournot model is based upon simultaneous moves, each firm could only make a (rational) guess as to its rival’s output choice. Paradoxically, firm 2 does worse when it has complete information about firm 1’s choice (the Stackelberg case) than it does when its information is less than perfect (the Cournot case). This is because saying the information is concrete amounts to saying that firm 1’s choice—at the time that firm 2 observes it—is irreversible. In the Stackelberg model, by the time firm 2 moves, firm 1 is already fully committed to q 1 = (A − c) 2B . In the Cournot context, q 1 = (A − c) 2B is not a best response to the choice q 2 = (A − c) 4B and so firm 2 would not anticipate that firm 1 would produce that quantity. In contrast, in the Stackelberg model we do not derive firm 1’s choice as a best response to q 2 = (A − c) 4B . Instead, we derived firm 1’s output choice as the profit-maximizing output when firm 1 correctly anticipates that firm 2’s decision is to choose its best value of q 2 conditional upon the output choice already made by firm 1. It is this fact that reflects the underlying assumption of sequential moves that distinguishes the Stackelberg model. Stackelberg’s modification to the basic Cournot model is important. It is a useful way to capture the observed phenomenon that one firm often has a dominant or leadership position in a market. The Stackelberg model reveals that moving first can have its advantage and therefore can be an important aspect of strategic interaction.

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  Introduction to Business Economics

  • (Author)
  • 2014(Publication Date)
  • Orange Apple

    (Publisher)

  The study of product differentiation indicates that oligopolies might also create excessive levels of differentiation in order to stifle competition. Oligopoly theory makes heavy use of game theory to model the behavior of oligopolies: • Stackelberg's duopoly. In this model the firms move sequentially. • Cournot's duopoly. In this model the firms simultaneously choose quantities. • Bertrand's oligopoly. In this model the firms simultaneously choose prices. ____________________ WORLD TECHNOLOGIES ____________________ Characteristics Profit maximization conditions : An oligopoly maximizes profits by producing where marginal revenue equals marginal costs. Ability to set price : Oligopolies are price setters rather than price takers. Entry and exit : Barriers to entry are high. The most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Number of firms : Few – a handful of sellers. There are so few firms that the actions of one firm can influence the actions of the other firms. Long run profits : Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits. Product differentiation : Product may be homogeneous (steel) or differentiated (automobiles). Perfect knowledge : Assumptions about perfect knowledge vary but the knowledge of various economic actors can be generally described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price, cost and product quality. Interdependence : The distinctive feature of an oligopoly is interdependence. Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions.

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  Economics

  • William Boyes, Michael Melvin(Authors)
  • 2015(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  § 26-1a 3. What is oligopoly? • Oligopoly is a market structure in which a few large firms produce identical or slightly different products and entry is difficult but not impossible. The firms are interdependent. § 26-2 • Oligopolies may arise from government restrictions or from natural economic factors such as economies of scale. § 26-2a 4. In what form does rivalry occur in an oligopoly? • Strategic behavior characterizes oligopoly. The firms are interdependent. The actions of each oligopolist will affect its competitors, and each will be affected by the actions of its rivals. § 26-2b • Game theory is a description of behavior when players’ decisions depend on the decisions of the other players. § 26-2b • The prisoners’ dilemma illustrates an outcome in which competition among interdependent firms results in an outcome that is less than the best for each firm. § 26-2c • The prisoners’ dilemma is a noncooperative game also called a dominant strategy game, one in which the parties select the dominant strategy. By doing so they do not select the best outcome for the parties as a whole. § 26-2c • A dominant strategy is one a player will select no matter what strategy other players choose. §26-2c • Nash equilibrium is an equilibrium when unilateral action by one party will make the party worse off. § 26-2c TABLE 3 Summary of Perfect Competition, Monopoly, Monopolistic Competition, and Oligopoly Perfect Competition Monopoly Monopolistic Competition Oligopoly Number of firms Many One Many Few Type of product Identical One Differentiated Identical or differentiated Entry conditions Easy Difficult or impossible Easy Difficult Demand curve Horizontal (perfectly elastic) Downward sloping Downward sloping Downward sloping Price and marginal cost MC ¼ P MC < P MC < P MC < P Long-run profit Normal Yes Normal Depends on whether entry occurs 582 Chapter 26 Monopolistic Competition and Oligopoly Copyright 2016 Cengage Learning.

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  Microeconomics

  A Global Text

  • Judy Whitehead(Author)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  12 Oligopoly Non-Collusive Models: Cournot, Bertrand, Chamberlin, Kinked-Demand, Stackleberg; Collusive Models: Price-Leadership, Cartels; Game Theory. The market structure of oligopoly, similar to that of monopolistic competition, is situated somewhere on the continuum between the models of perfect competition and monopoly. Unlike the three previous market structures, each of which can be dealt with as a single model, there are a plethora of models of oligopoly. A single thread running through this group of models is that the industry is composed of a few sellers, a small enough number that they are aware of each other. However, the way in which they acknowledge or act upon their interdependence with each other differs from one model to the other. Firms that were previously monopolies in their own domestic markets may become oligopolies as a result of regional integration or from greater trade liberalization. It is useful to examine the myriad models, non-collusive and collusive, and to observe their evolution as market conditions change over time. In this chapter, several of the classical or traditional models and the standard models of oligopoly, including the Game Theory are examined. The more recent developments in the theory of the firm pertaining mainly to the market structure of oligopoly are left to the next chapter. 12.1 ASSUMPTIONS, DEFINITIONS AND SUMMARY OF MODELS 12.1.1 Assumptions There are a number of assumptions that are common to all models of oligopoly. These are: • The industry consists of a small number of firms. This is understood to be fewer than under the market structure of Monopolistic Competition. • The goal of the firm is to maximize profit. • All factors are freely available to the firm at given prices. OLIGOPOLY C H A P T E R 12 • There is a great deal of interdependence (actual and/or perceived). • The products in the industry may be homogeneous or differentiated.

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  Microeconomics

  A Global Text

  • Judy Whitehead(Author)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  12 Oligopoly

  Non-Collusive Models: Coumot, Bertrand, Chamberlin, Kinked-Demand, StacHeberg ; Collusive Models: Price-Leadership, Cartels ; Game Theory .

  The market structure of oligopoly, similar to that of monopolistic competition, is situated somewhere on the continuum between the models of perfect competition and monopoly. Unlike the three previous market structures, each of which can be dealt with as a single model, there are a plethora of models of oligopoly. A single thread running through this group of models is that the industry is composed of a few sellers, a small enough number that they are aware of each other. However, the way in which they acknowledge or act upon their interdependence with each other differs from one model to the other.

  Firms that were previously monopolies in their own domestic markets may become oligopolies as a result of regional integration or from greater trade liberalization. It is useful to examine the myriad models, non-collusive and collusive, and to observe their evolution as market conditions change over time.

  In this chapter, several of the classical or traditional models and the standard models of oligopoly, including the Game Theory are examined. The more recent developments in the theory of the firm pertaining mainly to the market structure of oligopoly are left to the next chapter.

  12.1 Assumptions, Definitions and Summary of Models

  12.1.1 Assumptions

  There are a number of assumptions that are common to all models of oligopoly. These are:

  • The industry consists of a small number of firms. This is understood to be fewer than under the market structure of Monopolistic Competition.

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  Contemporary Industrial Organization

  A Quantitative Approach

  • Lynne Pepall, Dan Richards, George Norman(Authors)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  However, this first-mover advantage is rooted in the credibility of the leader’s commitment to produce q L = A − c 2 . Without this commitment, the model reverts to the Cournot duopoly model, in which the firms have symmetric outcomes. 9.2.1 Limit Output and Limit Price Models Because the Stackelberg leader chooses an output level that maximizes its profit if the rival firm enters, we cannot call its actions predatory. Predation is present when the dominant firm’s actions are only profitable if they drive the rival out or, in this case, keep it from entering. However, with a little imagination, we can modify the analysis to accommodate predatory behavior. To do this we assume that the follower or potential entrant must incur a one-time sunk entry cost F to enter the market. This does not change the rival’s best response to any output choice of the incumbent as described by equation (9.4). However, that equation only describes the follower firm’s best response if it actually produces any output. If it turns out that, even with its best response, the follower earns a negative profit, it will choose not to enter at all. 194 Oligopoly and Strategic Interaction Given the follower’s best response, market price for any output choice q L of the leader is P = A + c 2 − q L 2 (9.6) This implies that the entrant’s profit π F will be π F = A − c 2 − q L 2 2 − F (9.7) By choosing an output that makes this profit 0, the leader can thereby eliminate any incentive for the follower firm to enter. Thus, it would appear that the leader could deter entry by choosing q d L = A − c − 2 √ F (9.8) Note that the entry-deterring output of the leader is decreasing in the fixed costs F of the follower. Intuitively, it is easier for the leader to deter entry when the follower faces higher entry costs. More importantly, this implies that there is a value of fixed costs for the follower, above which entry is deterred without explicit strategic action by the leader.

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