Cournot assumes both firms choose quantity simultaneously. Heinrich von Stackelberg asked in 1934 what happens when one of them moves first, and the answer changed how economists think about capacity.
How does the Stackelberg leader gain from moving first?
Solve it backwards, since a sequential game can only be read from its last move. The follower observes the leader's quantity and best-responds along its Cournot reaction function. The leader, knowing this, chooses the quantity that maximises its own profit after substituting the follower's reaction function into the demand curve. For linear inverse demand P = a − bQ with common marginal cost c, the closed forms are compact:
- Leader quantity:
q_L = (a − c) / (2b) - Follower quantity:
q_F = (a − c) / (4b) - Leader profit:
π_L = (a − c)² / (8b) - Follower profit:
π_F = (a − c)² / (16b)
The leader always produces twice the follower and earns twice its profit.
The leader's profit is also exactly half the monopoly profit, which is a genuine feature of the linear symmetric case rather than a coincidence of these parameters.
The commitment point is the whole content of the model. On the cement demand system already solved for Cournot, the leader produces 150 while its own Cournot best response to the follower's 75 would be 112.5. The leader is deliberately producing more than it would want to if it could reconsider, and that output is credible only because it cannot: the capacity is built, the contracts are signed, the plant is committed. Take the commitment away and the equilibrium collapses back to Cournot.
A first-mover advantage is a reward for being irreversible rather than for being early, and an analyst reading a capacity announcement should ask which of the two it is.
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What is the dominant firm model?
The dominant firm with a competitive fringe is the same logic with a different follower. One large firm sets the price; a fringe of small price-takers supplies whatever they wish at that price; the dominant firm serves the remainder. The dominant firm's residual demand is market demand minus fringe supply, and it maximises profit on that residual curve. The result is a firm with a large share, a positive markup, and a price disciplined by how elastic the fringe's supply is.
Where the fringe can expand quickly the dominant firm's markup collapses however large its share, which is the formal version of the point the industry-structure work makes informally when it shows a concentrated domestic market held in check by the landed cost of imports.
Stackelberg vs Cournot: concentration and price
Now the result worth carrying back to the antitrust half. On the identical demand system, the Cournot duopoly has an output-share index of 5,000 and a price of ₹400. The Stackelberg outcome has an index of 5,556 and a price of ₹375. Concentration rose by 556 points, price fell by ₹25, quantity rose by 25 thousand tonnes, and total surplus rose by ₹0.21875 crore a month. A merger screen reading only the index would have flagged the second market as worse for consumers than the first, and it would have been wrong.
Concentration is an input to a judgment about pricing power. It is not the judgment.