14.4 Stackelberg Oligopoly Model

In the Cournot model, both firms announce their output decisions simultaneously. In contrast, suppose that one of the firms, called the leader, can set its output before its rival, the follower, does. This type of situation where one firm acts before the other arises naturally if one firm enters a market before the other. Would the firm that acts first have an advantage?

To answer this question, the German economist Heinrich von Stackelberg showed how to modify the Cournot model. We examined the Stackelberg model in Chapter 13, where United and American Airlines could choose among only three possible output levels. Here, we consider the more general problem where the airlines firms are free to choose any output ...

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