Stackelberg Examples

Game Theory · Axiom Academy

Unit 3 - Sequential Games: Solving a Linear Demand Stackelberg Model Excellent work! You've completed the Stackelberg equilibrium analysis. Here's what we learned: Sequential Rationality: The leader anticipates the follower's best response and incorporates it into their optimization problem, giving them a first-mover advantage. Backward Induction: We solve sequential games backward - first finding the follower's best response function, then the leader's optimal choice given that response. Stackelberg vs Cournot: The leader produces more and earns higher profits than in Cournot competition, while the follower produces less. Total output is higher in Stackelberg, leading to lower prices and higher consumer surplus. First-Mover Advantage: By committing to a quantity first, the leader strategically reduces the follower's market share and captures a larger portion of industry profits. This backward induction approach is fundamental to solving all sequential games. Practice with different demand and cost functions to master this technique!

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