Stackelberg Leadership as a Natural Solution Under Cost Uncertainty

This paper analyzes a differentiated duopoly model with cost uncertainty in an environment where information sharing is prohibited. The duopolists can commit themselves to be a Stackelberg leader or follower at the time when they know the distribution, but not the actual values, of their own and the rival's costs. In a natural Stackelberg situation, the firms agree on the assignment of roles and neither prefers the (Bayesian) Nash equilibrium. An natural Stackelberg situation is shown to be possible under quantity (but not price) competition. Total expected welfare is higher in the natural Stackelberg situation than in the Nash equilibrium.