Stackelberg leadership with demand uncertainty

Abstract

We consider a simple Stackelberg model with demand uncertainty only for the first mover in order to compare the advantages of leadership and flexibility, and use an example to provide some discussion about the endogenous order of moves in the presence of demand uncertainty. We find that only when the realized demand is in an intermediate zone does the first mover preserve its advantage; when the realized demand is far from its expected value, the second mover obtains higher profit than the leading firm, as the leadership advantage is dominated by the benefit of flexibility when demand fluctuation is significant. Even with this risk of losing flexibility under significant demand variation, for some parameter values in our model the first firm still has incentive to choose Stackelberg rather than Cournot competition. Copyright © 2005 John Wiley & Sons, Ltd.

Flexibility in a Stackelberg leadership with differentiated goods

“…We observe that for homogeneous goods (γ 1), the functions Iγ and Jγ coincide, i.e. I1 J1 (Liu's case [2]), and for non-homogeneous goods (0 γ < 1), we have that Iγ < Jγ . Observe that the curve given by E (π 1 * ) E (π 2 * ) crosses the curves P1 and P2 (see Figure 7).…”

“…The demand uncertainty θ α1/α0 can be interpreted as the maximum value of demand using the minimum value of demand α0 as the unit. In Theorem 1, we prove the existence of a unique perfect Bayesian equilibrium that requires a different reasoning from Liu's [2]. In Corollary 1, we compare the quantities produced by each firm and prove the existence of a threshold T for α, depending upon θ and γ , such that, bellow that threshold the leader is producing more than the follower and above that threshold the follower is producing more than the leader.…”

“…The probability of success of pioneering in a market clearly depends on many factors, including technology, marketing strategy, market demand and product differentiation (see [1][2][3][4][5][6][7][8][9][10][11][12][13][14][15][16][17][18]). Liu [2] studied the effect of uncertainty in demand systems where only the leading firm is facing uncertainty in the demand parameter α that is considered to be uniformly distributed on an interval α0, α1 . In this paper, we add the dimension of product differentiation to Liu's model and we show among other results that if their products are sufficiently differentiated, even with small uncertainty about the demand, the follower can achieve higher profits than the leader.…”

“…There are examples of successful and unsuccessful pioneering firms as described, for instance, in Liu [2]: Dell was the first to introduce the direct-sale business model into the PC market, and it achieved great success; however, during the dot-com booming era, Pets.com, Webvan.com, Garden.com and eToys.com were all unsuccessful first movers in their respective market segments. The probability of success of pioneering in a market clearly depends on many factors, including technology, marketing strategy, market demand and product differentiation (see [1][2][3][4][5][6][7][8][9][10][11][12][13][14][15][16][17][18]). Liu [2] studied the effect of uncertainty in demand systems where only the leading firm is facing uncertainty in the demand parameter α that is considered to be uniformly distributed on an interval α0, α1 .…”

Market Entry in the Presence of Network Effects

“…In addition, deferring entry may provide firms with the opportunity to free ride on the market development for which early movers had endured the costs and risks of developing and promoting (Kauffman & Li, 2005;Liu, 2005;Wernerfelt & Karnani, 1987). Thus, high levels of uncertainty bring about high levels of deferral options and, as a result, high thresholds for entering a market.…”