Author

Huajiang LUO

Date of Award

8-25-2015

Degree Type

Thesis

Degree Name

Master of Philosophy (MPHIL)

Department

Computing and Decision Sciences

First Advisor

Prof. SHANG, Weixin

Abstract

In duopoly Cournot competition with sequential moves, it is well known that each player prefers Stackelberg leadership without demand uncertainty. We study the same game when the demand is uncertain, and firms possess some private information about the uncertain demand. There are two effects of private information in this game. First, when the Stackelberg leader moves first, its private information is leaked to, or inferred by the Stackelberg follower via the output quantity. Hence, the Stackelberg follower makes decision based on more accurate information than the leader. Second, the leader incurs a cost to signal its information to the follower, which hurts the leader. Both effects hurt the Stackelberg leader, then the follower may earn more ex ante profit than the leader. When the demand is continuous, Gal-or (1987) assumes that firms follow linear decision rules and reports that the follower always sets a higher output quantity than the leader and earns more profit than the leader. However, our study finds that it is true if and only if the demand is unboundedly distributed. Otherwise, the Stackelberg leader's Pareto-optimal output quantity is not linear in its private information unless it observes the highest signal, and the follower does not always earn more ex ante profit than the leader. When the demand is discretely distributed, we study how the number of demand states influences the effect of cost of signaling. With more demand states, the effect of cost of signaling on the leader becomes more significant, and the follower may earn more ex ante profit than the leader.

Recommended Citation

Luo, H. (2015). Information leakage and Stackelberg leadership in Cournot competition (Master's thesis, Lingnan University, Hong Kong). Retrieved from http://commons.ln.edu.hk/cds_etd/12/