Market Competition, Firm Profits and Welfare in a Stackelberg Oligopoly with Cost Asymmetry

We revisit the relationships between competition and market outcomes in a Stackelberg oligopoly. Consider a differentiated oligopolistic market consisting of n leaders with different efficiencies and m followers. We show that the efficient leader's profit may increase with the number of followers and product substitution even if the followers are the most efficient firms. We relate this result to the success achieved by Changhong in the late 1990s, especially in the Chinese color TV industry, despite being faced with severe competition from foreign entrants. We also show that the effects of competition on producer surplus, consumer surplus, and social welfare are ambiguous