Profit comparisons between Cournot and Stackelberg duopoly with isoelastic demand function

Abstract

Duopoly is a market dominated by two firms, where the action of one firm will affect the other firm and also the market price of the product. In a Cournot duopoly, firms make their moves at the same time while in Stackelberg duopoly, one firm becomes the leader and so make the first move, followed by the other firm. In this paper, a duopoly market with isoelastic demand function and linear production cost is considered. The profit gained by each firm when both are competing in a Cournot duopoly and Stackelberg duopoly model were derived and compared. Results showed that regardless of whether the firms are moving simultaneously or sequentially, the firm with the lower production cost would gain a greater profit than the firm with the higher production cost. Also, profit wise, a firm with greater production cost than the other firm is better off making the first move instead of moving simultaneously with the other firm or following the other firm. On the other hand, a firm with lower production than the other firm is better off in becoming a follower rather than making the first move or moving simultaneously with the other firm.