A Noncooperative Equilibrium Concept with an Endogenously Determined Dominant Player: The Case of Cournot versus Stackelberg

Abstract

This paper examines the relationship between Cournot and Stackelberg equilibrium, and whether rational expected profit maximizing behavior of firms can help decide when noncooperative equilibrium might correspond to a Cournot equilibrium and when might it correspond to a Stackelberg equilibrium. An extensive form game is constructed with subgames whose Nash equilibra are Cournot and Stackelberg equilibrium. Equilibria of this larger game are studied. In a particular example with passive consumers, sufficient conditions for an industry to exhibit a Stackelberg structure, are obtained. Systematic changes in the properties of the equilibrium with changes in some specific exogenous characteristics of the market, are examined. This research hopes to help provide insight into circumstances under which one can endogenously determine a dominant player.