Stackelberg
Model
The Stackelberg model is an economic concept that describes a strategic interaction between two firms in an oligopoly market. In this model, one firm, known as the leader, takes the first move and makes production decisions before the other firm, known as the follower, reacts to those decisions.
To understand the Stackelberg model, we need to consider the following steps:
1. Identify the leader and follower: In an oligopoly market, there are two firms involved. One firm assumes the role of the leader, while the other is the follower. The leader has the advantage of making decisions first.
2. Determine the leader's decision: The leader makes its production decision, such as setting a particular level of output or price. This decision is based on its analysis of market conditions, demand, cost structure, and potential reactions from the follower.
3. Analyze the follower's response: Once the leader takes action, the follower observes the leader's decision and determines its response. The follower considers factors such as its own costs, market demand, and the leader's choice to make an optimal decision.
4. Assess the equilibrium outcome: The model aims to determine the equilibrium outcome, which is the final result after both the leader and follower make their decisions. This equilibrium is achieved when both firms make optimal choices based on their respective strategies.
The Stackelberg model is different from the standard Cournot or Bertrand models in that it recognizes asymmetric information and the advantage of being the first mover. It assumes that the leader can anticipate the follower's reaction and strategically position itself to gain an advantage in the market.
Analyzing the Stackelberg model requires understanding the cost structure, demand conditions, and decision-making process of both firms. Game theory and mathematical models are commonly used to analyze this strategic interaction between the leader and follower.
By studying this model, economists gain insights into market dynamics, pricing strategies, and the impact of different decision-making scenarios on firms' profitability and competitive advantage.