7b. Stackelberg

Question 1

What is the key to the “stackelberg” oligopoly?

Answer 1

That one of the firms is the leader, and set its output before its rival, the follower.

Question 2

What advantage does the leader have?

Answer 2

• Firm A (American Airlines) is the Stackelberg leader and chooses output first
• Firm U (United Airlines) is the follower and chooses output using best-response function

-> The Stackelberg leader (United) knows that the follower will use its best-response function

Question 3

So the leader will work ______ to find the ideal output.

Answer 3

BACKWARDS

1. Leader American chooses output qa
2. Follower United observes qa and chooses qu
   -> U would choose qu to max profit given qa… but AA anticipates this behaviour from UA and thus chooses qa to obtain a profitable reaction BY qu… so: qa > qu, profit America > profit United
3. Buyers purchase at the equilibrium price

Essentially, American knows United will use the best-response function, so they will use that function to choose the best output quantity for themselves

Question 4

How is inverse demand expressed, say the market demand function is “Q = 339 - p”, and Q = qa + qu ?

Answer 4

Question 5

How do you find the revenue of one of the two oligopolies, given the inverse demand function?

Answer 5

Considering revenue is just p * Q, the revenue for the oligopoly is the output of THAT oligopoly multiplied by the inverse demand

Question 6

How do you find marginal revenue given the revenue function?

Answer 6

Divide revenue BY quantity of output of the oligopoly you are trying to find MR for..

Question 7

Up until what point in the calculation is Stackelberg the SAME as Cournot?

Answer 7

Up until the “best response function”
-> same for both

Question 8

What does the leader do with the best-response function of the follower in the calculation?

Answer 8

They swap the “qu” (quantity of follower) by that followers BEST RESPONSE FUNCTION

Question 9

Which structure grants the greatest Consumer Surplus?

Answer 9

Price Taking

Monopoly and Cartel the LEAST

Question 10

Which structure grants the greatest Profit?

Answer 10

Monopoly and Cartel

Price taking is ZERO profit
Cournot high profit, Stackelberg lower than cournot

Question 11

Which structure grants the greatest Welfare?

Answer 11

Inverse of profit…

1) Price Taking
2) Stackelberg
3) Cournot
4-5) Monopoly and Cartel

Question 12

What is specific about the “Stackelberg equilibrium” in this diagram?

Answer 12

So stackelberg is on the best-response curve of the follower! Whereas the leader (america) produces BEYOND the best-response curve!

Question 13

What does this DIG show?

Answer 13

Potential profits per structure