Stackelberg versus Cournot duopoly with asymmetric costs: primary markups, entry deterrence, and a comparison of social welfare and industry profits

In a linear Stackelberg (S) and Cournot (C) duopoly model with homogeneous product, it is well known that S yields higher consumer surplus than C. The comparison of social welfare (or industry profit), however, can go both ways if costs are asymmetric. We show that a remarkably simple characterizati...

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Bibliographic Details
Published in:Economic theory bulletin 2020-04, Vol.8 (1), p.89-96
Main Authors: Zouhar, Jan, Zouharova, Martina
Format: Article
Language:English
Subjects:
Asymmetry
Duopoly
Economic models
Economic theory
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Equilibrium
Game Theory
Macroeconomics/Monetary Economics//Financial Economics
Monopolies
Profits
Public Finance
Qualitative research
Research Article
Social and Behav. Sciences
Social welfare
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Summary:In a linear Stackelberg (S) and Cournot (C) duopoly model with homogeneous product, it is well known that S yields higher consumer surplus than C. The comparison of social welfare (or industry profit), however, can go both ways if costs are asymmetric. We show that a remarkably simple characterization can be obtained in terms of the ratio of the leader’s and the follower’s primary markup: social welfare (industry profit) is greater in C than in S if and only if this ratio is between 1/2 and 31/38 (between 1/2 and 19/14). Furthermore, this ratio also determines the qualitative type of equilibrium: Monopoly is reinstalled from both S and C if and only if the ratio lies outside the interval (1/2, 2); for values between 3/2 and 2, the Stackelberg leader deters entry of an inefficient follower while producing more than a monopolist would.
ISSN:2196-1085
2196-1093
DOI:10.1007/s40505-019-00167-3