Stackelberg Competition

The Stackelberg model describes a scenario where one firm takes the role of a quantity leader, deciding its production level first.

While all other firms act as followers, determining their production levels after observing the leader's choice.

The leader might emerge due to its market power, size, reputation, innovative capacity, information, or historical dominance.

For example, consider two firms, Aquaspark and Briskspring, which manufacture the same product.

Aquaspark, the leader, determines its optimal production considering all possible outputs by the follower, Briskspring.

Briskspring, in turn, optimizes its production levels, given all possible initial output levels to which the leading firm might commit. Their reaction functions are shown in the graph.

Aquaspark, the leader, sets its production at QA1, and Briskspring, the follower, responds with QB1 based on its reaction function.

Point E_S represents the Stackelberg equilibrium on the graph, where the leader’s and follower’s production decisions satisfy both firms’ profit-maximizing strategies.

Notably, the leader’s initial decision is considered irreversible because the follower observes it and adjusts its strategy accordingly.