Endogenous Stackelberg Leadership when Costs are Private Information

Abstract

SummaryLately several authors have tried to explain the emergence of Stackelberg leadership as an endogenous feature of duopoly models. This article describes two models where assumptions of incomplete information about the rival firm’s marginal cost of production creates incentives for duopolistic firms to end up in a sequential choice situation. In the first model the duopolists can commit themselves to be a Stackelberg leader or follower at the time when they know the distributions, but not the actual values, of their own and the rival’s cost. The central result from this model is that under quantity (but not price) competition the duopolists may agree on who should be the leader and who should be the follower. In the second model the firms cannot commit to a specific role. In the quantity setting version of this model they must decide both when and how much to produce. It turns out that there can never be an equilibrium where they both always produce in the same period. However, there are equilibria where one firm produces in the first period and the other in the second, i.e. Stackelberg-type equilibria. Similar results are found in a price setting version of the model.