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Stackelberg Leadership with Demand Uncertainty

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.