Endogenous Stackelberg Leadership

Eric van Damme and Sjaak Hurkens

Abstract: We consider a linear quantity setting duopoly game and analyze which of the players will commit when both players have the possibility to do so. To that end, we study a 2-stage game in which each player can either commit to a quantity in stage 1 or wait till stage 2. We show that committing is more risky for the high cost firm and that, consequently, risk dominance considerations, as in Harsanyi and Selten (1988), allow the conclusion that only the low cost firm will choose to commit. Hence, the low cost firm will emerge as the endogenous Stackelberg leader.

Keywords: Duopoly, Stackelberg, equilibrium selection.

Classification Number: C72, D43.

Games and Economic Behavior 28: 105-129 (1999)