When the Stackelberg Leadership Model was first developed in 1934, the two firms in the model competed on Quantity. In Cournot competition, each firm decides its production quantity simultaneously. Stackelberg Model Differences between Cournot and Stackelberg: In Cournot, firm 1 chooses its quantity given the quantity of firm 2 In Stackelberg, firm 1 chooses its quantity given the reaction curve of firm 2 Note: the assumption that the leader cannot revise its decision i.e. This model applies where: (a) the firms sell homogeneous products, (b) competition is based on output, and (c) firms choose their output sequentially and not simultaneously. Industrial Organization-Matilde Machado Stackelberg Model 15 3.3. It assumes you are already somewhat familiar with KNIME and Market Simulation. The Stackelberg leadership model results in a higher market quantity and lower price for the good as compared to the Cournot model. 27 Cournot versus Stackelberg II. Pass-through MetaNodes are used to collect these Market conditions during each loop iteration. The Market Leader can take advantage of this model as it can first predict the Follower’s Best Response, then set its own strategy accordingly. This recognition allows the sophisticated duopolist to determine the reaction curve of his rival […] http://demonstrations.wolfram.com/CournotCompetitionWithTwoFirms/, Utility Maximization with a Kinked Budget Constraint. Therefore, each company has t… Open content licensed under CC BY-NC-SA. The Bertrand Equilibrium model describes consumer purchasing behavior based on prices of products. It was formulated by Heinrich Von Stackelberg in 1934. This paper studies undesirable competition in an asymmetric Stackelberg oligopoly under both unit and ad valorem taxation. The Stackelberg leadership model is a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially. The firms have the same costs and face the same demand as they did above, but you'll get different answers now that it is Stackelberg. (Stackelberg competition.) Are there any additional Nash equilibria ? The leader makes a production decision q 1, then two followers make a simul- taneous decision about their production levels q … Stackelberg Model. Posted by Scientific Strategy | Sep 21, 2018 | Market Simulation | 0 |. In the Stackelberg model, the leader decides how much output to produce with other firms basing their decision on what the leader chooses. Here, the Market Leader has a Cost Advantage over the Follower who sells a very similar (but not identical) Product. Note: Your message & contact information may be shared with the author of any specific Demonstration for which you give feedback. (a) Calculate and draw the reaction (or best reply) function of firm 1 (that is, calculate the profit-maximizing output of firm 1 for every possible output of firm 2). Both rms have the same unit production cost c = 30. http://demonstrations.wolfram.com/CournotCompetitionWithTwoFirms/ Profit function of firm 1 ; First order condition for firm 1 direct effect follower effect Cournot 0; 28 Exercise (Stackelberg) Find the equilibrium in a Stackelberg competition. The final downstream Line Chart nodes plot the Price / Market Share / Revenue / Profitability for both the Leader and Follower at every Test Price. But this Market Simulation is based upon Price Competition. Your email address will not be published. Stackelberg duopoly, also called Stackelberg competition, is a model of imperfect competition based on a non-cooperative game. The price is determined by the inverse demand function , where . Cournot Competition describes an industry structure (i.e. Stackelberg with 3 firms Imagine there are three firms on a monopolistically competitive market. To be more specific, in the or model, the retailers are engaged in Bertrand or Stackelberg competition. Page 2 of 16 Pages So, Firm 1’s best response to q2 or Firm 1’s reaction function is: 2 120 2 1 2 q q R q − = = (1) Since the profit- maximization problem faced by the two firms are symmetric in this Incidentally, in many textbooks, Cournot competition is cited as the application of Nash equilibrium. Hence the model was an alternative to Cournot Competition, with the Stackelberg Leadership Model resulting in lower Prices and greater total output Quantity. The Stackelberg model of oligopoly within managerial economics illustrates one firm’s leadership in an oligopoly. (ii) When B is the leader and A the follower, the Stackelberg solution is . Kazuki Kumashiro Cournot equilibrium corresponds to the purple point at which two best response lines intersect. This Demonstration illustrates a simple Cournot competition in which there are only two firms, and the inverse function is . Central to Cournot's model are market demand curves, costs and marginal revenue curves. GS-101 Installing the KNIME Analytics Platform, GS-102 Adding Scientific Strategy to KNIME, GS-111 Understanding the Market Simulation Nodes. Interact on desktop, mobile and cloud with the free Wolfram Player or other Wolfram Language products. A Nash Equilibrium is reached when the Price set by the Leader, and the Best Response by the Follower, are: The bottom two ports of the Tuning Loop End Node are used to take a snapshot of the Market conditions (Product Array and WTP Matrix) at the point where the Leader’s Profitability is maximized. Remember: The inverse-demand for the product is P = 140 - (Q1 + Q2). Intuitively, since a firm with low marginal cost can produce efficiently, its production is larger than another firm with high marginal cost. Hence the model was an alternative to Cournot Competition, with the Stackelberg Leadership Model resulting in lower Prices and greater total output Quantity. The Market is defined by, Once the Leader sets the Test Price (sweeping incrementally from $70 to $200) it is up to the Follower to set their Best Response. This Demonstration illustrates a simple Cournot competition in which there are only two firms, and the inverse function is .The horizontal axis represents and the vertical one represents .A red line and a green line represent the best response of firms 1 and 2 for the production of another firm, respectively. What Will Be The Equilibrium Quantities Produced By Each Firm When Firm 1 Moves First (Stackelberg Competition)? Stackelberg equilibrium also results in a lower market price than that observed in Cournot equilibrium. To calculate the Follower’s Best Response to all scenarios, the Market Leader sweeps its own Price from $70 to $200 (in $5 increments) using the ‘Tuning Loop Start‘ node. 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