Flexibility in a Stackelberg leadership with differentiated goods

We study the effects of product differentiation in a Stackelberg model with demand uncertainty for the first mover. We do an ex-ante and ex-post analysis of the profits of the leader and of the follower firms in terms of product differentiation and of the demand uncertainty. We show that even with small uncertainty about the demand, the follower firm can achieve greater profits than the leader, if their products are sufficiently differentiated. We also compute the probability of the second firm having higher profit than the leading firm, subsequently showing the advantages and disadvantages of being either the leader or the follower firm.

This work is part-funded by the ERDF European Regional Development Fund through the COMPETE Programme (operational programme for competitiveness) and by National Funds through the FCT Fundação para a Ciência e a Tecnologia (Portuguese Foundation for Science and Technology)within project FCOMP – 01-0124-FEDER-022701.This work was partly funded by National Funds through the FCT Fundação para a Ciência e a Tecnologia (Portuguese Foundation for Science and Technology) within project PTDC/MAT/121107/2010. Fernanda Ferreira, Flávio Ferreira and Miguel Ferreira thank financial support from ESEIG/IPP. Alberto Pinto also thanks financial support from FCUP/UP. Miguel Ferreira also thanks financial support given by FCT in the form of a Pos-Doc grant with the reference SFRH/BPD/73357/2010.