Question

Question 17: Compare the assumptions of a Cournot market with those of a Stackleberg market.

Answer 1

The Cournot model of oligopolistic market applies where (a) the companies produce homogeneous products, (b) they compete on output & market share simultaneously, & (c) they expect their rival firm to not modify their output in reaction to any modification that the make.

Cournot equilibrium is the level of output at which each company’s in the oligopolistic industry maximizes its profitability given the output level of all other companies. No company can gain from modifying its level of output away from Cournot equilibrium as the reaction of other companies will wipe out any extra profit. The intersection point of the best- reaction curves of the companies is the Cournot equilibrium. If there’re 2 firms, A & B, the reaction curve of B plots B’s profit-maximizing output given various output levels of A & vice versa.

A Stackelberg oligopoly is one wherein a company is a leader & other companies are followers. This model applies when: (a) the companies sell homogeneous goods, (b) competition is connected with output, & (c) companies select their output level sequentially & not concurrently.

The leader is usually a 1^st -mover who selects its output before other companies can do it. As other companies must determine their output given the leader’s output determination, the leader in this type of oligopolistic industry typically has a greater market share & greater profitability than other companies in the oligopoly