The Basics
- Simple definition: An oligopoly model where one firm (the leader) chooses output first, and others (followers) choose after observing the leader’s choice.
- Core idea: First-mover advantage – the leader commits to output, forcing followers to respond.
- Think of it as: The market chess game where one player moves first, anticipating how others will react.
What It Actually Means
Heinrich von Stackelberg’s model introduces sequential moves. The leader chooses quantity, knowing followers will respond with their best reactions. The follower then chooses the given leader’s quantity. The leader’s first-mover advantage yields a higher profit than the Cournot equilibrium (where moves are simultaneous). The follower does worse. The model captures real-world situations with dominant firms, incumbents, and market pioneers.
Example
In Pakistan’s cement industry, a dominant firm (Lucky Cement) might expand capacity aggressively. Smaller firms (followers) then choose their output knowing Lucky’s capacity. Lucky anticipates these reactions and chooses capacity accordingly.
Why It Matters
Stackelberg models first-mover advantages, strategic commitment, and market leadership. It informs antitrust analysis of dominant firms and entry deterrence.
See also
Oligopoly • Cournot Model • First-Mover Advantage • Strategic Commitment • Reaction Functions
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