4 Is a Stackelberg leader guaranteed to make a higher profit

4. Is a Stackelberg leader guaranteed to make a higher profit than it would under standard Cournot competition? Explain using words and graphs. (20 pts)

Solution

Under Stackelberg leadership what happens is that the leader player sets a quantity and the follower player takes the quantity as given and substitutes it into his reaction function and obtains his own quantity. This is contrary to the Cournot case where players operate simultaneously to determine their quantities and hence determine individual profits. A Stackelberg leaders profits will always be higher than that of a Cournot player as the output level of the leader would be higher than if we operated under Cournot competition. The nature of the isoprofit curves also play a role and the tangency of the isoprofit curve and the reaction function determine the Cournot and Stackelberg quantities.