Working Paper: CEPR ID: DP14978
Authors: Toomas Hinnosaar
Abstract: The standard model of sequential capacity choices is the Stackelberg quantity leadership model with linear demand. I show that under the standard assumptions, leaders' actions are informative about market conditions and independent of leaders' beliefs about the arrivals of followers. However, this Stackelberg independence property relies on all standard assumptions being satisfied. It fails to hold whenever the demand function is non-linear, marginal cost is not constant, goods are differentiated, firms are non-identical, or there are any externalities. I show that small deviations from the linear demand assumption may make the leaders' choices completely uninformative.
Keywords: sequential games; oligopolies; Stackelberg leadership model
JEL Codes: C72; C73; D43; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Leaders' actions (D73) | Market conditions (D49) |
| Standard assumptions (C51) | Leaders' actions (D73) |
| Standard assumptions (C51) | Informative actions (Y20) |
| Deviations from standard assumptions (C29) | Uninformative actions (D89) |
| Small deviations from linear demand (D11) | Altered leader's optimal quantity (D79) |