MS&E 246: Lecture 7
Stackelberg games
Ramesh Johari
Stackelberg games
In a Stackelberg game, one player
(the “leader”) moves first,
and all other players (the “followers”)
move after him.
Stackelberg competition
• Two firms (N = 2)
• Each firm chooses a quantity sn ≥ 0
• Cost of producing sn : cn sn
• Demand curve:
Price = P(s1 + s2) = a – b (s1 + s2)
• Payoffs:
Profit = Πn(s1, s2) = P(s1 + s2) sn – cn sn
Stackelberg competition
In Stackelberg competition, firm 1 moves
before firm 2.
Firm 2 observes firm 1’s quantity choice s1,
then chooses s2.
Stackelberg competition
We solve the game using
backward induction.
Start with second stage:
Given s1, firm 2 chooses s2 as
Π2(s1, s2)
s2 = arg maxs2 ∈ S2
But this is just the best response R2(s1)!
Best response for firm 2
Recall the best response given s1:
Differentiate and solve:
So:
Firm 1’s decision
Backward induction:
Maximize firm 1’s decision, accounting for
firm 2’s response at stage 2.
Thus firm 1 chooses s1 as
s1 = arg maxs1 ∈ S1
Π1(s1, R2(s1))
Firm 1’s decision
Define tn = (a - cn)/b.
If s1 ≤ t2, then payoff to firm 1 is:
If s1 > t2, then payoff to firm 1 is: