In a Stackelberg duopoly, Firm A (the leader) commits to a large output quantity. Firm B (the follower) observes this and plays its best response. Compared to the Cournot simultaneous-game outcome, which result is expected?
AFirm A produces less and earns more; Firm B produces more and earns less
BFirm A produces more and earns more; Firm B produces less and earns less
CBoth firms produce more than Cournot, and both earn higher profits due to higher total output
DBoth firms produce the same quantities as in Cournot, but at a lower equilibrium price
The leader commits to a quantity larger than the Cournot level. Faced with this, the follower's best response is to produce less than it would in Cournot (since the market is already being flooded by the leader). Total output rises, price falls, but the leader captures enough of the market to earn higher profit than in Cournot, while the follower is left with a smaller share and earns less. The follower would prefer the simultaneous Cournot game but cannot credibly commit to ignoring the leader's choice.
Question 2 Multiple Choice
The Stackelberg leader uses backward induction by doing which of the following?
AChoosing the output level that maximizes joint industry profit and announcing it to the follower
BGuessing the follower's likely output and best-responding as in Cournot, but moving first
CSubstituting the follower's best-response function into its own profit function, then maximizing
DSetting price rather than quantity, which forces the follower to take the residual market
The leader does not guess — it knows the follower is rational and will play its best response. So the leader substitutes the follower's reaction function (which is the same as in Cournot) directly into its own profit expression. This converts the problem into an unconstrained single-variable optimization. The result is a quantity larger than the Cournot level, which then forces the follower into a smaller response. This is the essence of backward induction: start from the end of the game tree, work backward, and optimize at each node.
Question 3 True / False
In Stackelberg competition, total industry output is higher and the market price is lower than in the equivalent Cournot duopoly.
TTrue
FFalse
Answer: True
The leader produces more than its Cournot quantity, and even though the follower produces less than its Cournot quantity, the net effect is that total output increases. A higher total quantity on a downward-sloping demand curve means a lower market price. This is why the follower is worse off: lower price combined with lower output yields strictly lower profit than the Cournot benchmark.
Question 4 True / False
The Stackelberg leader gains its first-mover advantage primarily because it is more efficient or has lower production costs than the follower.
TTrue
FFalse
Answer: False
The first-mover advantage in Stackelberg competition has nothing to do with efficiency or cost differences. It comes entirely from the sequential structure of the game: the leader's commitment is observable and irreversible, forcing the follower to treat the leader's quantity as given. If both firms were identical in costs, the leader still gains by exploiting the follower's rationality through commitment. This is why sequential timing — not competitive advantage — is the defining feature of the model.
Question 5 Short Answer
Why does moving first give the Stackelberg leader an advantage, and what would happen to that advantage if the leader could secretly revise its quantity after observing the follower's decision?
Think about your answer, then reveal below.
Model answer: Moving first confers an advantage only when the commitment is credible and irreversible — once the leader has produced (or contracted) a large quantity, the follower must accept that as a fixed constraint and choose its best response given that output. The leader exploits the follower's rationality: by committing to a large quantity, it forces the follower to scale back, capturing more market share. If the leader could secretly revise its quantity after the follower decided, the commitment would not be credible — the follower would anticipate the revision and the game would collapse to the simultaneous Cournot outcome, eliminating the first-mover advantage.
This is the core insight about sequential games: commitment value requires irreversibility. An action that can be undone provides no strategic leverage. The Stackelberg result rests on the assumption that the leader's output choice is observable and binding before the follower chooses. This is also why the model applies to real-world settings like capacity investment (hard to reverse) but not to settings where rivals can respond before production decisions are finalized.