Stackelberg Model

1599 Words Jan 11th, 2013 7 Pages
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). He underlined the idea of duopoly problem and the non-cooperative behavior of the firms.
In 1934, Heinrich F. von Stackelberg came up with another model that explains the strategic game through which the firms in an oligopoly decide the level of output in a sequential manner.
The following essay evaluates the usefulness of the Stackelberg Model in
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If both firms try to become leaders by increasing the quantity produced, there will be overproduction in the market leading to decrease in prices. The effect will be a decrease in profits for both firms.

III- Implications and applications:

Stackelberg model has been extended and modified to adjust a number of real market scenarios. The model has been empirically tested for more than two players in the oligopoly to fit the real complexities of the economic world. The extension to n-player model has been tested for different market conditions both, where the information is perfectly interracted amongst all players, and where there is uncertainty and incomplete information.
Boyer and Moreaux (1987) developed a model will perfect information, while on the other hand, Gal-Or (1985à and Albaek have done research on Stackelberg Model of Oligopoly with incomplete information. Gal-or argues that in opposite to the belief that first mover advantages result in a two-player Stackelberg model, the model can be extended to include multiple players.
Similarly, the model has been tested for a market situation where there are multiple leaders.
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.
These variances of the model help practicioners indentity and understand the behavior of firms in
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