Experimental studies checking Cournot competition against Stackelberg competition [show that] while Stacjlberg equilibrium outcomes are seldom under quantity competition, under price competition, the Stackleberg equilibrium prediction seems to be more appropriate.
There are some further constraints upon the sustaining of Stackelberg equilibrium. The leader must know ex ante that the follower observes his scion. The follower must have no means of committing of committing to a future non-Stackleberg follower action and the leader must know this. Indeed, if the 'follower' could commit to a Stackelberg leader action and the 'leader' knew this; the leader's best response would be to play Shackelberg follower action.
In contrarian quantity competition, an aggressive firm that invests early acting as a Stackelberg leader can acquire a larger share of the market. Under reciprocating price competition, a Stackelberg price leader would choose a price on the competitor's reaction function that maximizes its profit value. Given the prior action of the Stackelberg leader, the Stackelberg follower would then maximize its own profit value, […], taking the action of he leader, […], as given. In he case of an accommodating price leader there need not be a first-mover advantage, as both firms can "collude" setting higher prices compared to the situation that they invest at the same time.
Stackelberg pointed out that the leader has an advantage because he can anticipate the follower behavior as a function of its own output q2=f(q1), and optimize his quantity using that information. Stackelberg model can be thought as a particular case of conjectural variation model, where the leader has q2=f(q1) as a conjecture of the reaction of the follower, while the follower expect not reaction of the leader.
Firms may engage in Stackelberg competition if one has some sort of advantage enabling it to move first. More generally, he leader must have commitment power. Moving clearly first is the most obvious means of commitment: once the leader has made its move, it cannot undo it - it is committed to that action. Moving first may be possible if the leader was the incumbent monopoly of the industry and the follower is a new entrant. Holding excess capacity is another means of commitment.
The problem with Stackelberg competition concerns the assumes credibility of precommitment. How can the leader irreversibly precommit himself to a certain strategy? How can he credibly "tie his hands" so that he can never take advantage of second-round gains? Without answering these questions, Stackelberg competition is simply not meaningful.
Firms may engage in Stackelberg competition if they have any advantage enabling them to move first. The leader must have commitment power. Besides committing by moving first, once the leader has moved, it cannot undo its decision and is committed to that action. This first-mover advantage is similar to a situation if the leader was in an industry where they were an incumbent monopoly and the follower was a new entrant.
Consider a two-period model. In the first period, firm 1 selects its output, and in the second period, firm 2 observes the choice of firm 1 and then selects its own output. Firm 1 is better off, and the intuition is as follows: What advantage would you gain by being second? You would observe what the first firm chose. Then, you would select the quantity that maximizes your profit given what the first firm chose. But, if you're so smart, isn't your competitor smart as well? Can't your competitor also calculate, ahead of time, what you will do? Obviously, the first firm can predict the reaction of the second firm. Then, who has more power? The second firm is simply reacting to the choice of firm 1. The first firm, then, by choosing its quantity is maximizing its own profit, taking this reaction into account.
H. von Stackelberg, showed some of the implications or potentialities of the theory of monopolistic competition by independently developing it in a form suitable for Fascism. In addition to the purely quantitative profit principle, he introduces several elements in pricing. These include habits, tendencies to stability, agreements, and time lags. Stackelberg distinguishes and analyzes various cases of duopoly and of joint demand.
The Stackelberg leadership model is a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially. It is named after the German economist Heinrich von Stackelberg who published Markform und Gleichgewicht in 1934 which described the model.