On the Effects of an Industry-wide Cost Change in a Stackelberg Duopoly

Consider a homogeneous Stackelberg leader-follower duopoly with quantity competition, in which both firms face the same industry-wide marginal costs. This paper investigates the comparative static effects of a change in these marginal costs. We show that an increase of the costs will lead to a decrease of the total market output. However, it turns out that the output of the leader firm might increase. We present conditions under which the latter counterintuitive effect occurs.