In this model, the firms simultaneously choose quantities see cournot competition. Oligopoly refers to a market situation in which there are a few firms selling homogeneous or differentiated products. Although cournots 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. For a 2 firm stackelberg s oligopoly game, we can simply use the best response function of the follower firm and use it in the profit maximization function of leaders firm. Stackelberg duopoly, also called stackelberg competition, is a model of imperfect competition based on a noncooperative game. Now change the example discussed in last lecture as. Oligopoly a market with a small number of rms usually big oligopolists \know each other characterized by interdependence and the need for managers to explicitly consider the reactions of rivals. The stackelberg leadership model is a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially. Extending the model to more than two firms, we can observe that the equilibrium of the game gets closer to the perfect competition outcome as the number of firms increases, decreasing market concentration. Traditional oligopoly models predict that, under constant marginal costs, there will only be one market share cournot or a single firm with a large market share and all others with the same market share stackelberg. Haugh department of ie and or, columbia university, new york, ny 10027. How does the stackelberg equilibrium compare with the cournot. However, when i repeat the procedure with a 3 firm stackelberg s game, the results seem inconclusive. Pure because the only source of market power is lack of competition.
The other firm, a leader, takes into account the adjustment which the follower firm will make. Oligopoly theory makes heavy use of game theory to model the behavior of oligopolies. The stackelberg model of oligopoly within managerial economics illustrates one firms leadership in an oligopoly. Some of the central concepts of duopoly analysis have to do with strategic behavior, and the. Oligopoly theory made simple university at albany, suny. Apr 18, 2014 this finding is not viewed as a handicap of the model. In the cournot model, firms choose quantities simultaneously and independently, and industry output determines price through demand. The first systematic oligopoly model was published by the french economist antoine augustin cournot 180177 in 1838. Pdf chapter 12 monopolistic competition and oligopoly. The stackelberg model assumes that one firm the leader chooses its quantity first, followed by the other firm the follower. Oligopoly overview cartel model cournot model stackelberg model 1 i. Research, however, never ends, and the cournot model faces new challenges. Stackelberg duopoly models reconsidered springerlink.
In this model, we shall retain the assumptions i to ix of the cournot model, and the assumption x here would be. Introduction to game theory this is the way modern economists model oligopoly industries with a small number of firms who take into account each others actions it is also used to model. What are the characteristics of a monopolistically competitive market. Profit maximization in four oligopoly settings sweezy kinkeddemand model cournot model stackelberg model bertrand model iv. Much of traditional microeconomics presumes that firms act as passive pricetakers, and thus avoids the complex issues involved in. Industrial organization matilde machado stackelberg model 16 3. An example of a pure oligopoly would be the steel industry, which has only a few producers but who produce exactly the same product. Augustin cournots model oligopoly was made by the french economist augustin cournot in 1839. We will start in section 2 by describing the basic cournot duopoly model, and we will develop that model in sections 3 and 4.
This paper generalizes and unifies the traditional quantity competition oligopoly models of cournot and stackelberg. Dec 04, 2012 this video solves a standard stackelberg problem that is encountered when studying oligopoly models. It describes the strategic behaviour of industries in which there is a dominant firm or a natural leader and the other firms are the followers. The two primary characteristics of a monopolistically. Three important models of oligopoly price and output.
It was developed in 1934 by heinrich stackelberg in his market structure and equilibrium and represented a breaking point in the study of market structure, particularly the analysis of duopolies since it was a model based on different starting assumptions and. Industrial organizationmatilde machado stackelberg model 15 3. Oligopoly theory lies at the heart of industrial organisation io since its object of study is the interdependence of firms. Common models that explain oligopoly output and pricing decisions include cartel model, cournot model, stackelberg model, bertrand model and contestable market theory. In stackelberg games, being able to act first is an advantage in certain situations and a disadvantage in others. Oligopoly is, sometimes, also known as competition among the few as there are few sellers in the market and every seller influences and is influenced by the behaviour of other firms. A generalized oligopoly model wiley online library. It depends on whether the product is homogeneous or differentiated. In cournot, firm 1 chooses its quantity given the quantity of firm 2 in stackelberg, firm 1 chooses its quantity given the reaction curve. I have another video that solves a threefirm cournot model, along with other videos examining other. The internet economy is exploding, and there are literally thousands of great earnings opportunities available right now, all just one click away. Stackelberg versus cournot oligopoly equilibrium sciencedirect. It is well known that bertrand duopoly competition. Another area of application of the model is the analysis of futures.
This violates a major assumption of the basic competitive model in that model, rms are small and prices are taken as given. Non collusive oligopoly models 1 augustin cournots model 2 bertrands model 3 edgeworths model 4 stackelberg,s model 11. The algebra of the stackelberg model since the follower reacts to the leaders output, the followers 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. Traditional oligopoly models predict that, under constant marginal costs, there will only be one market share cournot or a single firm. Oligopoly models cournot vs stackelberg vs bertrand. Stackelberg models that are commonly discussed in introductory microeconomics courses. It was developed in 1934 by heinrich stackelbelrg in his market structure and equilibrium and represented a breaking point in the study of market structure, particularly the analysis of duopolies, since it was a model based on different starting assumptions and. Stackelberg model of duopoly comparison of cournot duopoly ne and stackelberg ne q 1 q 2 p. Despite its hybrid nature, followup work has shown that this model is less ambiguous when addressing speci. The reason there are more than one model of oligopoly is that the interaction between firms is very complex. We often think of the leader as an incumbent firm and the follower as a potential entrant. This paper advocates a generalized nfirm stackelberg model as a plausible testable alternative description of oligopoly. These models are often starting points for the study of strategic firm interaction. A cournot stackelberg model of supply contracts with financial hedging ren e caldentey booth school of business, the university of chicago, chicago, il 60637.
The cournot oligopoly model is the most popular model of imperfect competition. The stackelberg model is a quantity leadership model. Cournots model is a simultaneous game, stackelberg s is a sequential game. Obviously a duopoly is the simplest sort of oligopoly, and many of the concepts and results that we will describe can be extended to the case of an oligopoly with more than two. Feb 25, 2019 common models that explain oligopoly output and pricing decisions include cartel model, cournot model, stackelberg model, bertrand model and contestable market theory. Pdf the stackelberg model for a leader of production and many. Although the cournot model and the stackelberg model of duopolistic. In this model, the firms move sequentially see stackelberg competition. Another common form of leadership is for the leading firm to set price. You may also be interested in my other economics videos, especially those on cournot and. 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. What happens to the equilibrium price and quantity in such a market if one firm introduces a new, improved product. Obviously a duopoly is the simplest sort of oligopoly, and many of. The crucial behavioral assumption of the cournot model is that.
Duopoly analysis by economists dates back to the 19th century. Stackelberg versus cournot oligopoly with private information eray cumbuly iese business school, barcelona abstract in this paper, we compare an n rm cournot game with a stackelberg model, where n rms choose outputs sequentially, in a stochastic demand environment with private information. The stackelberg leadership model results in a higher market quantity and lower price for the good as compared to the cournot model. Marks 1998 oligopoly 1 oligopoly and strategic pricing in this section we consider how. This video shows how to solve a cournot problem, an important model of oligopoly behavior.
Same assumptions as the cournot model except that firms decide sequentially. Mergers in stackelberg markets with efficiency gains. We will describe the stackelberg model in section 5. Anderson university of virginia, charlottesville, va 22901, usa maxim engers university of virginia, charlottesville, va 22901, usa final version received may 1991 we compare an mfirm cournot model with a hierarchical stackelberg model where m firms choose outputs. Stackelberg model of duopoly stackelbergs model of duopoly also has to do with companies trying to decide how much of a homogeneous good to produce. Prisoners dilemma in the discussion that follows, all of the games are played only once. Derive reaction function just like we did for cournot then nd optimal q 1, given firm 1 can deduce 2s reaction. Oct 26, 2011 real people just like you are kissing the idea of punching the clock for someone else goodbye, and embracing a new way of living.
The algebra of the stackelberg model since the follower reacts to the leaders output, the followers output is determined by its reaction function the stackelberg leader uses this reaction function to determine its profit maximizing output level, which simplifies to 2 1 2 2 1 0. In the first period the leader chooses its quantity. In the stackelberg model, the leader decides how much output to produce with other firms basing their decision on what the leader chooses. A cournotstackelberg model of supply contracts with. Is there any advantage in being the first to choose. Stackelberg versus cournot oligopoly with private information. Industrial organizationmatilde machado stackelberg model 3 important questions. The stackelberg model of oligopoly with derivation. Dec 04, 2012 this video shows how to solve a cournot problem, an important model of oligopoly behavior. This paper explores the relationship between mergers, welfare, and concentration, using a twostage oligopoly model that generalizes the cournot and stackelberg models. Oligopoly outline 1 stackelberg mit opencourseware. This video solves a standard stackelberg problem that is encountered when studying oligopoly models. A cournot equilibrium is a nash equilibrium to the cournot model. Northholland stackelberg versus cournot oligopoly equilibrium simon p.
Mathematical properties of a combined cournotstackelberg model. Stackelberg model differences between cournot and stackelberg. Pdf oligopoly is a market situation where there are a small number of bidders at least two of a good nonsubstituent and a sufficient number. The cournot and stackelberg models assume firms compete by altering. This model assumes that there are two firms in the industry, but they are asymmetrical. I have another video that solves a threefirm cournot model.