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Cournot and Stackelberg Models Explained

This document provides an overview of basic oligopoly models in managerial economics, including Cournot and Stackelberg models. It discusses key concepts like reaction functions, isoprofit curves, and Cournot equilibrium. It also examines how costs can impact the Cournot equilibrium and describes the Stackelberg model where one firm acts as a leader by committing to an output first before followers maximize their profits.

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Warda javed
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80 views11 pages

Cournot and Stackelberg Models Explained

This document provides an overview of basic oligopoly models in managerial economics, including Cournot and Stackelberg models. It discusses key concepts like reaction functions, isoprofit curves, and Cournot equilibrium. It also examines how costs can impact the Cournot equilibrium and describes the Stackelberg model where one firm acts as a leader by committing to an output first before followers maximize their profits.

Uploaded by

Warda javed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

Managerial Economics &

Business Strategy
Chapter 9
Basic Oligopoly Models
Work through demonstration
problem 9-4 (put away your books)

• Suppose the inverse demand function for two


Cournot duopolists is given by P=10-(Q1+Q2) and
their costs are zero
• What is each firm’s MR?
• What are the reaction functions for the two firms
• What are the Cournot equilibrium outputs?
• What is the equilibrium price?
Isoprofit Curve
• Along each curve profit is the same
• Curves closer to the “monopoly output” are
associated with higher profits
 Monopoly outputs are at intersection of reaction function and
axis (X for firm 1 and Y for firm 2)
• Reaches peak at intersection of reaction function
• Do not intersect each other
Firm 1’s Isoprofit Curve
Q2

r1

B
C Increasing
Profits for
A 1 = $100 Firm 1
D

1 = $200

Q1M Q1
Another Look at Cournot
Decisions
Q2

r1 Firm 1’s best response to Q2*

Q2*
 1 = $100
 1 = $200

Q1 * Q1M Q1
What about firm 2??
• Isoprofit curves are the mirror image of firm 1’s
isoprofit curves
Another Look at Cournot
Equilibrium
Q2
r1 Firm 2’s Profits

Q2M Cournot Equilibrium

Q2*

Firm 1’s Profits

r2

Q1* Q1 M Q1
Impact of Rising Costs on the
Cournot Equilibrium
Q2
r1*
Cournot equilibrium after
firm 1’s marginal cost increase
r1**

Q2**
Cournot equilibrium prior to
firm 1’s marginal cost increase

Q2*
r2
Q1** Q1 *
Q1
Stackelberg Model
• Cournot assumed that firms were mirror
images of each other  Stackelberg doesn’t
• Firms produce differentiated or homogeneous
products.
• Barriers to entry.
• Firm one is the leader.
 The leader commits to an output before all other firms.
• Remaining firms are followers.
 They choose their outputs so as to maximize profits,
given the leader’s output.
• Behaves like a cournot oligopolist
What does it look like
mathematically?
What happens?
• Knows follower will choose a point on their own
reaction function
 Leader chooses output on the follower’s reaction function that
corresponds to their highest profits
 Corresponds to the TANGENCY of the leader’s isoprofit curve
to the followers reaction function

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