Question

Ah Lian is a successful businesswoman. While she has not received any formal training in economics, she has shrewd (but not always accurate) insights on how firms behave. One day, she came across your lecture notes, and read about the example of Stackelberg competition between Coke and Pepsi. Ah Lian thinks that a 2-stage Stackelberg game between Coke and Pepsi in which Coke makes its quantity decision first, followed by Pepsi (upon observing Coke’s decision), is outcome-wise equivalent to a 3-stage Stackelberg game between Coke and Pepsi in which Pepsi makes the decision first, followed by Coke (upon observing Pepsi’s decision), and then by Pepsi (upon observing Coke’s decision) again. Do you think that she is right? Explain your reasoning.

Answer 1

YES SHE IS RIGHT AS PER STACKELBERG THEORY A LEADER IN THE MARKET MAKES HIS FIRST MOVE AND THEN THE OTHER COMPETITOR MAKES HIS MOVE IT IS KNOWN AS STACKELBERG LEADERSHIP MODEL.

HERE WE CAN SEE THAT COKE DECISION WAS FIRST IN TERMS OF QUANTITY SETTING UP LATER THIS HAS INFLUENCED THE PEPSI MARKET TO ANNOUNCE ITS DECISION.

IN THE FIRST STAGE OF MARKET THE COMPANIES WOULD INDEPENDENTLY ANNOUNCE ITS QUANTITY BUT LATER IN THE SECOND STAGE THE COMPANIES WOULD CHOOSE THERE LEVEL OF ACTUAL OUTPUT .

IN THE THIRD STAGE WE CAN SEE THAT THE LEADERSHIP QUANTITY DECISION IS TAKEN BY THE PEPSI COMPANY SO THE STAGES BEGIN AGAIN FROM THE FIRST STAGE WITH THE QUANTITY SETTING DUOPOLY