Welfare-Improving Effect of a Small Number of Followers in a Stackelberg Model

Abstract

AbstractWe investigate a Stackelberg oligopoly model in which m leaders and $N - m$ followers compete. We find an important welfare effect that relates to anti-monopoly policies when we move from the Cournot model ($m = N$) to the Stackelberg model: Exchanging a small number of Cournot firms for Stackelberg followers always improves welfare under moderate conditions. This contrasts with the welfare effect that can reduce welfare when a small number of Cournot firms are exchanged for Stackelberg leaders. The key result behind this asymmetry is the contrasting limit results in the cases where m converges to N and m converges to 0. We also discuss the optimal number of leaders and the integer constraint for the number of firms.