Abstract
A static market model of duopoly, with the government influencing the market, is formulated as a Stackelberg game with one leader and two Nash followers. By using a strategy which is a function of the decisions of the Nash duopolists, the government may induce them to virtually cooperate. Marginal cost, price, elasticity of demand, total profits and consumers' welfare, when this incentive mechanism is used, are compared to the corresponding quantities under voluntary cooperation.
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