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

Jan Zouhar () and Martina Zouharova ()
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Jan Zouhar: University of Economics
Martina Zouharova: University of Economics

Economic Theory Bulletin, 2020, vol. 8, issue 1, No 7, 89-96

Abstract: Abstract 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.

Keywords: Stackelberg oligopoly; Cournot oligopoly; Linear model; Homogeneous product; Primary markup; Entry deterrence (search for similar items in EconPapers)
JEL-codes: D43 L13 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s40505-019-00167-3

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