In a linear Stackelberg (S) and Cournot (C) duopoly model with homogeneous product, it is well
known that S yields higher consumer surplus than C. The comparison of social welfare (or industry
profit), however, can go both ways if costs are asymmetric. We show that a remarkably simple
characterization can be obtained in terms of the ratio of the leader’s and the follower’s primary markup:
social welfare (industry profit) is greater in C than in S if and only if this ratio is between 1/2 and 31/38
(between 1/2 and 19/14). Furthermore, this ratio also determines the qualitative type of equilibrium:
Monopoly is reinstalled from both S and C if and only if the ratio lies outside the interval (1/2, 2); for
values between 3/2 and 2, the Stackelberg leader deters entry of an inefficient follower while producing
more than a monopolist would.
