Differentiate between the assumptions of a Cournot’s model and the Stackelberg model.

 The Cournot Model and the Cournot Solution: 

The first systematic oligopoly model was published by the French economist Antoine Augustin Cournot (1801-77) in 1838. Although Cournot’s model was based on some unrealistic assumptions, his method of analysis has been useful for subsequent theoretical development in the areas of duopoly and oligopoly. 

The Assumptions of the Cournot Model: 

The Cournot model is based on the following assumptions:

(i) There are only two non-collusive firms, i.e., there exists the simplest example of oligopoly, viz., duopoly 

(ii) The two sellers (duopolists), say A and B, are producing homogeneous goods. 

The model’s other assumptions (from which most of the models discussed hereafter will draw) are:

(iii) The product is perishable, i.e., they cannot be stored and must all be sold within the duration of the period. 

(iv) There are many knowledgeable buyers of the product 

For example, if A produces and sells CF quantity of output, then the total quantity of output sold would be OF, and we can know from the demand curve, DD1, that the price of the product at this quantity would be EF. 

Therefore, under the circumstances, duopolist A’s demand curve would be dDc and the quantity-axis and the price-axis of this demand curve would be, respectively, CT and Cd. Now, if E be the midpoint of segment dD1, then B’s output (qB) remaining the same at OC = constant, if qA increases from zero onwards (and p diminishes), A’s total revenue (RA) and total profit (πA) would also increase till qA becomes equal to CF. 

This is because the numerical coefficient of price-elasticity of demand (eA) is greater than one (eA > 1) over the segment dE of A’s  demand curve, and the total costs of the duopolists (CA and CB) at each output are zero [assumption (vi)]. 

If qA increases beyond the quantity CF (and p diminishes), then A’s total revenue (RA) and total profit (nA) would be decreasing, since, over the segment ED] of his demand curve, eA is less than one (eA < 

1). At the point E on A’s demand curve dD1 we have = 1 and marginal revenue of A (MRA) = 0, and so, at E, RA and πA are maximum. 

The Stackelberg leadership model is a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially. It is named after the German economist Heinrich Freiherr von Stackelberg who published Market Structure and Equilibrium (Marktform und Gleichgewicht) in 1934 which described the model. 

In game theory terms, the players of this game are a leader and a follower and they compete on quantity. The Stackelberg leader is sometimes referred to as the Market Leader. There are some further constraints upon the sustaining of a Stackelberg equilibrium. The leader must know ex ante that the follower observes its action. The follower must have no means of committing to a future non-Stackelberg leader's action and the leader must know this. Indeed, if the 'follower' could commit to a Stackelberg leader action and the 'leader' knew this, the leader's best response would be to play a Stackelberg follower action. 

Firms may engage in Stackelberg competition if one has some sort of advantage enabling it to  move first. More generally, the leader must have commitment power. Moving observably first is  the most obvious means of commitment: once the leader has made its move, it cannot undo it - it  is committed to that action. Moving first may be possible if the leader was the incumbent  monopoly of the industry and the follower is a new entrant. Holding excess capacity is another means of commitment. 

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