An oligopoly refers to the economic state of affairs where there are several houses in the industry doing a merchandise whose monetary value depends on the measure ( Examples can include big houses in computing machine. chemicals. automobile… ) Cournot was the first economic expert to research and explicate the oligopolistic competition between the two houses in an oligopolu ( Cournot and Fisher in 1897 ) . He underlined the thought of duopoly job and the non-cooperative behaviour of the houses. In 1934. Heinrich F. von Stackelberg came up with another theoretical account that explains the strategic game through which the houses in an oligopoly decide the degree of end product in a consecutive mode. The undermentioned essay evaluates the utility of the Stackelberg Model in explicating the behaviour the houses in oligopolistic markets. Furthermore. it will be discussed that how realistic the theoretical account is in today’s universe though economic diagrams and relevant theories.
II- Stackelberg Model of Oligopoly:
Oligopoly has been addressed through a figure of theoretical accounts including Cournot Model. Bertrand Model and Stackelberg Model. The first 1 has made a great part towards explicating oligopoly every bit good as non-cooperative game theory. However the staying two theoretical accounts have made parts towards get the better ofing the restrictions of the Cournot Model.
The Model fundamentally explains the strategic game in which the market leader makes the first move. and the other follower houses in the oligopoly make consecutive moves. The leader house chooses the measure foremost. and based on the leader firm’s measure. the follower houses set the measure. Once both measures are chosen. the monetary value is set to unclutter the market. The leader has the first mover advantage on the footing of better engineering. higher production capacity. or the exisiting monopoly. Therefore the leader house has the advantage of higher net incomes. due to its high measure. The Stackelberg theoretical account has an irreversible nature. that is to state it involves lasting action or committedness of agents where subsequently movers observe the moves or action of the first movers. and so acti in the game.
To explicate how it works. Lashkar-e-Taibas consider two houses. A and B that produce homogeneous merchandises in an oligopoly. To do it simple. it’s assumed that A and B are the lone houses in the oligopoly. Firm A is the leader house. and B the follower one. QA represents the measure decided and produced by house 1 and QB the measure the follower house B will bring forth in sequence. The Sum of QA and QB will ensue in the market demand. RF ( A ) and RF ( B ) represent the reaction curves of both houses severally. In this instance. the theoretical account states that both houses decide on their end product in sequence ( due to the oligopoly ) . The leader chooses the end product degree due to its capacity of being the first mover.
By puting this degree. the leader makes a committedness that will be adjusted by the follower. so he will profit by maintaining the degree of measure high for itself. Besides. the follower has to maintain its degree comparatively lower than the one of the leader. The equilibrium measure is determined by the point of tangency between the reaction curve B and the lowest possible isoprofit of A. The point of intersection is besides known as house A’s bliss point as it maximizes the fringy public-service corporation for house A. The equilibrium monetary value is determined by reverse market demand. and since both houses seek to maximise their net incomes. they end up finding a measure where their margninal costs equal the fringy gross ( MC=MR )
The Stackelberg theoretical account follows phases where in the first phase. house A takes the action of puting the quanity. while house B does nil. This measure is decided maintaining in head mind the expected reply of the follower. In the following statge. house B knows the QA and so decides the measure it wants to bring forth in respoonse to QA. In this phase. house Angstrom does non take any action. The premise here being that both houses know the measure decided by each other. The logic of the follower’s scheme of maintaining its degree of ouput depression is that in that state of affairs. merely one house can perchance move as a market leader. If both houses try to go leaders by increasing the measure produced. there will be overrun in the market taking to diminish in monetary values. The consequence will be a lessening in net incomes for both houses.
III- Deductions and applications:
Stackelberg theoretical account has been extended and modified to set a figure of existent market scenarios. The theoretical account has been through empirical observation tested for more than two participants in the oligopoly to suit the existent complexnesss of the economic universe. The extension to n-player theoretical account has been tested for different market conditions both. where the information is absolutely interracted amongst all participants. and where there is uncertainness and uncomplete information. Boyer and Moreaux ( 1987 ) developed a theoretical account will hone information. while on the other manus. Gal-Or ( 1985a and Albaek have done research on Stackelberg Model of Oligopoly with uncomplete information.
Gal-or argues that in antonym to the belief that first mover advantages result in a two-player Stackelberg theoretical account. the theoretical account can be extended to include multiple participants. Similarly. the theoretical account has been tested for a market state of affairs where there are multiple leaders. Sherali ( 1984 ) tried to see the state of affairs of multiple leader oligopolies with the premise that each leader house assumes that its actions do non precipitate responses from other leader houses. These discrepancies of the theoretical account aid practicioners indentity and understand the behaviour of houses in their several oligopolies.
IV- Empirical Examples:
This theoretical account is largely used to analyse many industries where one house acts as a leadern piece others as followings. Economists and research workers use it to understand and measure their behaviour in an oligopoly. For case. Yu. Huanf and Liang ( 2009 ) have adopted this theoretical account to understand the supply concatenation of seller managed invetory production. The maker of the merchandises is trated as the leader as it is responsible signifier amnaging the investories for all the retail merchants. The retail merchants on the other manus are treated as followings.
The leader knows the action of each retail merchant. and optimizes the investing on advertizements. rhythms of natural stuffs and the finished merchandises to maximise its net incomes. As a consequence of this move. the retail merchants sequantially follow the manufacturer’s decisionas input parametric quantities so that they can find the degree of retail monetary value and investings in advertizements to maximise the net income. Hence. an optimum supply concatenation solution is reached. In this instance. the Stackelberg theoretical account helps in finding optimum spend by retail merchants and makers to maximise their net incomes.
These empiral illustrations reveal the utility of Stackelberg theoretical account in explicating the behaviour of houses. It has been through empirical observation tested and proved that the theoretical account provides realistic consequences in the short term. However. if we talk about the long term. every house tries to go the first mover by roll uping experience and acquisition. This enables the houses to spread out their capacities and engineering to go the first mover. Hence. in the long tally. the theoretical account does non significantly keep. Apart from that. the industry construction besides has an of import function.
The theoretical account can merely be applied to the industries where one house has important border over other houses in term of capacity and experience. In such a state of affairs. other houses tend to follow the capacity and measure values of the market leader. However. in a market where houses are more or less at the same size. the theoretical account doesn’t give realistic consequences. since in such a state of affairs. each house tries to go the market leader. In such an oligopoly. Cournot Model gives more realistic consequences.
Like all economic theoretical accounts. Stackelberg Model has its ain portion of failings and restrictions. As opposed to Cournot and Bertrand Models. Stackelberg Model doesn’t clasp when applied to multiple clip periods. It assumes that every house in a two participant oligopoly can instead go leader and follower indifintely. The theoretical account ignores the fact that with clip. each and every house tries to get alone capablenesss by traveling up the acquisition curve. Therefore. each house will seek to go first mover over a drawn-out period of clip. therefore a symmetric form shouldn’t emerge.
Through analysis and careful probe of the Stackelberg Model of Oligopoly. the undermentioned decisions have been derived:
The significance and relevancy of the theoretical account depends on the market state of affairs and the features of the oligopoly. Although the theoretical account gives higher net incomes to the houses as compared to Cournot-Nash Model. the appropriateness depends largerly in the industry construction ( Boyer and Mareaux. 1987 ) . If the industry construction includes houses of approximately similar size where no house can bask leading place. Cournot theoretical account is more suited. However. for the industry where one house has a signicant advantage over other houses. Stackelberg Model gives more realistic consequences. This can be seen in the industries that are dominated by a fewer immense houses that take lead in the debut of a new thought or merchandise construct.
For exmple. Apple can be considered a market leader due to its ability to come up with new engineering before anyone else does. Furthermore. it can besides be concluded that Stackelberg Model is realistc every bit long as we keep in head its restrictions. The theoretical account has been progressively used in many industries across the universe to explicate the behaviour of the houses in oligopoly. However. there are restraints in the simple Stackelberg Model. These restrictions and failings are rectified by many alternate approached to the theoretical account through uniting Stackelberg with other theoretical accounts explicating oligopolistic behaviour of the houses.