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Stackelberg Model of Duopoly

The document outlines the Stackelberg Model of Duopoly, which describes a market structure where two firms compete, with one acting as a leader and the other as a follower. It explains concepts such as oligopoly, duopoly, collusion, and tacit collusion, highlighting their implications for market behavior and competition. The model emphasizes the sequential decision-making process of firms regarding production quantities to maximize profits.

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125 views11 pages

Stackelberg Model of Duopoly

The document outlines the Stackelberg Model of Duopoly, which describes a market structure where two firms compete, with one acting as a leader and the other as a follower. It explains concepts such as oligopoly, duopoly, collusion, and tacit collusion, highlighting their implications for market behavior and competition. The model emphasizes the sequential decision-making process of firms regarding production quantities to maximize profits.

Uploaded by

iaminstinctgamer
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Course Name : Game Theory

Course code : AI3105


Credits :4
Semester : B.TECH V Sem

10. Stackelberg Model of Duopoly


D E PA R T M E N T O F A R T I F I C I A L I N T E L L I G E N C E & M A C H I N E L E A R N I N G

M A N I PAL U N I V ERS ITY JA I P U R


ACADEMIC SESSION 2023 – 2024

STACKELBERG MODEL OF DUOPOLY 1


Topics 1. Stackelberg Model of Duopoly
Covered

TOPICS 2
Stackelberg Duopoly Model
Oligopoly: A state of limited competition, in which a market is shared by a small number of players.
An oligopoly is a type of market structure that exists within an economy.
In an oligopoly, there is a small number of firms that control the market.
Duopoly: A situation in which two suppliers dominate the market for a commodity or service.
A duopoly is a form of oligopoly, where only two companies dominate the market.
The companies in a duopoly tend to compete against one another, reducing the chance of
monopolistic market power.
Visa and Mastercard are examples of a duopoly that dominates the payments industry in
Europe and the United States.

Collusion: Secret agreement, especially in order to do something dishonest.


Collusive oligopoly is a form of the market, in which there are few firms in the market and all
of them decide to avoid competition through a formal agreement.
They collude to form a cartel, and fix for themselves an output quota and a market price.

STACKELBERG MODEL OF DUOPOLY 3


Tacit Collusion
Tacit Collusion:

Tacit collusion is a type of collusive behavior where firms coordinate their actions without explicitly
communicating or reaching an agreement. Instead, firms may signal their intentions through various actions,
such as pricing behavior or output levels, in order to coordinate their behavior and achieve higher profits.

Unlike explicit collusion, which involves direct communication and agreement among firms to fix prices or
divide markets, tacit collusion is more subtle and difficult to detect. In some cases, tacit collusion may occur
naturally due to market conditions, such as limited competition or high barriers to entry.

STACKELBERG MODEL OF DUOPOLY 4


Tacit Collusion
Tacit Collusion:

Examples of tacit collusion include:


1. Price leadership: In some industries, one firm may set prices that other firms follow, without any explicit
agreement. This can lead to a stable market with little competition.

2. Implicit understandings: Firms may have implicit understandings about each other's pricing or output
behavior, without any direct communication or agreement.

3. Limit pricing: A dominant firm in an industry may set prices at a level that deters entry by potential
competitors. Other firms in the industry may follow suit, leading to higher profits for all firms.

Tacit collusion can be difficult to prove and is often illegal under antitrust laws, as it can lead to reduced
competition and higher prices for consumers. Regulators may use various methods, such as analyzing pricing
behavior and market structure, to detect and deter tacit collusion.

STACKELBERG MODEL OF DUOPOLY 5


Tacit Collusion
Follower firm Y will always have to cooperate so that the Tacit Collusion continues.

STACKELBERG MODEL OF DUOPOLY 6


by
German economist,
Heinrich Stackelberg
in 1934

STACKELBERG MODEL OF DUOPOLY 7


Stackelberg Duopoly Model
Stackelberg model describes an oligopoly market model based on a non-cooperative strategic game
between 2 market players where:
Firm-1: The LEADER moves first and decides how much to produce.

Firm-2: The FOLLOWER firm decide how much to produce afterwards in response to the LEADER firm.

Assumptions:
1. Firms decide sequentially on the output they produce, which means we have a model
consisting of 2 distinct periods. First, the leader chooses its production quantity. Then,
the follower firm chooses its output after observing the quantity chosen by the leader.

2. Each firm acts strategically on the assumption that its competitor will not change their
output, and decides its own production quantity to maximize its profit given its
competitors’ output.

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Stackelberg Duopoly Model
Demand Function Inverse Demand Function

STACKELBERG MODEL OF DUOPOLY 9


Stackelberg Duopoly Model
Ex-2: Find solution for the following Stacklberg duopoly problem.

The selections of follower in both


subgame trees reduce the game to only
2 states, from which now the leader can
select the 72,56 state of higher payoff
for himself.
Convert the given payoff matrix into extension tree
form. Leader backtraces the outputs for both
himself and the follower.

STACKELBERG MODEL OF DUOPOLY 10


Thank You

STACKELBERG MODEL OF DUOPOLY 11

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