The Stackelberg Leader-Follower Model (Stackelberg Equilibrium)

Heinrich von Stackelberg presented the third important oligopoly model in 1934. In the Stackelberg model, firms set output (not price) and one firm acts before the others.

The leader firm picks its output level and then the other firms are free to choose their optimal quantities given their knowledge of the leader's output.

For example, the firm that discovers and develops a new product has a natural first-mover advantage.

Example : Same data than in Cournot Model.

Cost function of each of the two firms : C = 0,28q (no fixed costs, to simplify). Market Demande curve : q = 1000 – 1000p. Market Price function : p = 1- 0,001q

Suppose firm F₁ is the leader and the firm F₂ the follower. Firm F₁ realizes that once it sets its output, the follower firm F₂ will use its Cournot best-response function to pick its optimal q₂.

The output choosen by F₁ is 360 units. Then the output choosen by F₂ is calculated by using the best-response function : [q₂ = 360 - 0,5q₁] = 180 units

	Output	Price	Revenue	Cost	Profit
F1 (leader)	360	0,46	165,60	100,80	64,80
F2 (follower	180	0,46	82,80	50,40	32,40
Industry	540	0,46	248,40	151,20	97,20

Sources :

Modern Industrial Organization, 2nd edition, Dennis .W. Carlton , Jeffrey .M. Peroloff, Addfison-Wesley, 1994

Economie Industrielle ( traduction de la 2ème édition par Fabrice Mazerolle), Dennis .W. Carlton , Jeffrey .M. Peroloff, de Boeck Université, 1998

Gaining and Soustaining Competitive Advantage, Jay. B. Barney, Addison-Wesley, 1997

Contemporary Strategic Analysis, Robert M. Grant, 3th edition, Blackwell, 1998

Strategic Management, Professor Raphael Amit, Faculty of Commerce and Business Administration, University of British Columbia, Vancouver, B.C., Canada

Cours de Microéconomie, Bernard Jaquier, Ecole Hôtelière de Lausanne, 2003

 

Page publisher : Bernard Jaquier, Professor in Economics and Finance, Ecole Hôtelière de Lausanne, Switzerland, 2003