Answer :
In a duopoly framework, both Stackelberg and Cournot models are used to analyze how firms compete and make decisions about output and pricing. Let's explore these models and understand the welfare implications of each.
Cournot Model
The Cournot model, named after Augustin Cournot, assumes that firms choose quantities simultaneously and independently without knowing the other firm's decision. In this model, firms have to anticipate the reaction of their competitor when deciding their output.
- Firms produce the same product and choose output simultaneously.
- Each firm's output decision affects the market price.
- A Nash Equilibrium is reached when neither firm wants to change their output decision, given the output of the other firm.
Stackelberg Model
The Stackelberg model is named after Heinrich von Stackelberg, and it differs from Cournot in that firms have a leader-follower structure.
- One firm, known as the leader, chooses its output level first.
- The other firm, the follower, observes the leader's decision and then chooses its output.
- This model allows the leader to potentially achieve a higher profit by committing to a slightly different strategy, anticipating the follower's reaction.
Welfare Implications
Welfare in economics refers to the allocation of resources and how they affect the overall well-being of society. The welfare outcome in these models depends on consumer surplus and firm profits.
- In the Cournot model, firms choose their output simultaneously, leading to a certain equilibrium price and quantity.
- In the Stackelberg model, the leader can produce a quantity that maximizes its advantage by anticipating the follower's response. This can lead to lower prices and better outcomes for consumers due to slightly higher output, albeit at the potential expense of the follower's profits.
Comparing Welfare Outcomes
Consumer Welfare: The Stackelberg model can often lead to higher consumer welfare than the Cournot model because the leader produces more, leading to lower prices.
Total Welfare: Although the Stackelberg model may deliver higher consumer surplus due to lower prices, it may also lead to an uneven distribution of profit where the leader gains more. Total welfare, which includes both consumer and producer surpluses, might be higher in the Stackelberg model.
In conclusion, the statement that Stackelberg assumptions offer better welfare outcomes than Cournot is often correct regarding consumer welfare, as it tends to lead to higher output and lower prices. However, the interpretation depends on specific market conditions, including cost structures and firm strategies.
