Endogenous Co‐Leadership When Demand is Uncertain

Abstract

Consider an oligopolistic industry where production is time‐consuming, so that each firm needs to make quantity commitment by producing before the market opens. If demand uncertainty resolves some time before the market arrives, then those firms who produce early behave as simultaneous leaders (co‐leaders), whilst those who wait until demand becomes observable will be followers. We discover that, in an n‐firm oligopoly, the equilibrium number of co‐leaders tends to be in excess of their socially optimal number, albeit both numbers monotonically decrease in the magnitude of demand uncertainty relative to the expected level of demand. We also find that, with demand uncertainty and the possibility of Stackelberg behaviour, whether the excess entry theorem applies depends upon the number of existing followers.