Airlines could be another example of this. For Bertrand I would say Pepsi vs. However, it illustrates the leader's advantage. One company makes something new and the competitors make a similar product but not exactly the same. In this case, the model states that both firms decide on their output in sequence due to the oligopoly. Now the best response function of the leader is considered.
The model has been increasingly used in many industries across the world to explain the behavior of the firms in oligopoly. The model has been empirically tested for more than two players in the oligopoly to fit the real complexities of the economic world. The first one has made a great contribution towards explaining oligopoly as well as non-cooperative game theory. Pharmaceutical Industry The pharmaceutical industry is becoming an oligopoly due to the staggering costs of developing and marketing new drugs and because of patents that protect new products from competitors. } This is the leader's best response to the reaction of the follower in equilibrium. The leader then picks a quantity that maximises its payoff, anticipating the predicted response of the follower. However its inability to do so is what allows it to receive higher profits than under cournot.
Similarly, the model has been tested for a market situation where there are multiple leaders. I- Introduction: An oligopoly refers to the economic situation where there are several firms in the industry making a product whose price depends on the quantity Examples can include large firms in computer, chemicals, automobile… Cournot was the first economist to explore and explain the oligopolistic competition between the two firms in an oligopolu Cournot and Fisher in 1897. Sherali 1984 tried to consider the situation of multiple leader oligopolies with the assumption that each leader firm assumes that its actions do not precipitate responses from other leader firms. V- Implications: These empiral examples reveal the usefulness of Stackelberg model in explaining the behavior of firms. This enables the firms to expand their capacities and technology to become the first mover. This function is calculated by considering the follower's output as a function of the leader's output, as just computed. If it can observe, it will so that it can make the optimal decision.
This example is fairly simple. The leader considers what the of the follower is, i. Horizontal differentiation occurs when a one product is always considered superior to the other across a broad spectrum of consumers. Profit maximization then requires each firm to choose a price that maximizes its total revenue. However, for the industry where one firm has a signicant advantage over other firms, Stackelberg Model gives more realistic results.
Even my books from Uni didn't have any example. Products A and B both have constant marginal cost of production of 10 per unit and no fixed cost. However, there are constraints in the simple Stackelberg Model. These variances of the model help practicioners indentity and understand the behavior of firms in their respective oligopolies. Intuitively, if the leader was no better off than the follower, it would simply adopt a strategy.
The following essay evaluates the usefulness of the Stackelberg Model in explaining the behavior the firms in oligopolistic markets. The model is solved by. Any threat by the follower claiming that it will not observe even if it can is as uncredible as those above. The leader has the first mover advantage on the basis of better technology, higher production capacity, or the exisiting monopoly. The leader knows the action of each retailer, and optimizes the investment on advertisements, cycles of raw materials and the finished products to maximize its profits. However the remaining two models have made contributions towards overcoming the limitations of the Cournot Model.
Moving first may be possible if the leader was the incumbent monopoly of the industry and the follower is a new entrant. If you have questions about homework problems, please submit them to. In this case, the best response of the leader would be to play Stackelberg. The quantity demanded for firm A and firm B is a function of both the price the firm establishes and the price established by their rival because the goods are highly substitutable. Each firm acts as a Bertrand competitor.
Hence, an optimal supply chain solution is reached. For a good reading list of academic papers, see for an undergraduate level list and for the truly ambitious see. Companies in technology, pharmaceuticals and health insurance have become successful in establishing oligopolies in the U. Indeed, it is the very thing that makes a Cournot strategy profile a Nash equilibrium in a Stackelberg game that prevents it from being subgame perfect. However, in an indefinitely repeated Stackelberg game, the follower might adopt a punishment strategy where it threatens to punish the leader in the next period unless it chooses a non-optimal strategy in the current period. While these companies are considered competitors within the specific market, they tend to cooperate with each other to benefit as a whole, which can lead to higher prices for consumers. Holding excess capacity is another means of commitment.