Stackelberg and First Mover Advantage

The Stackelberg oligopoly model demonstrates the advantage of being the first mover, where the leader firm can secure a higher payoff than the follower.

This advantage stems from the leader’s ability to anticipate the follower’s response and incorporate it into its production decision.

To illustrate, consider Firm A and Firm B in the solar panel industry.

 Firm A acts as the leader and decides its production level first. It chooses to produce 10,000 high-quality solar panels, anticipating that Firm B will observe and adjust accordingly. This interaction is illustrated in the reaction function graph.

 Firm B’s production decision is based on its reaction function, which determines its profit-maximizing output, given Firm A’s production. Firm B responds by producing 8,000 panels.

 Graphically, the Stackelberg equilibrium is represented at the point where Firm A produces 10,000 solar panels, and Firm B produces 8,000 solar panels, capturing their desired market shares without engaging in a price war.

This example demonstrates the strategic advantage of being the leader in the Stackelberg model. By moving first, Firm A not only maximizes its profit but also impacts the follower's production decision, reinforcing its market leadership.