Experimental Economics

, Volume 12, Issue 3, pp 289–317 | Cite as

Price leadership and firm size asymmetry: an experimental analysis



We use laboratory experiments to examine the effect of firm size asymmetry on the emergence of price leadership in a price-setting duopoly with capacity constraints. Independent of the level of size asymmetry, the unique subgame perfect equilibrium of our timing game predicts that the large firm is the price leader. Experimental data show that price leadership by the large firm is frequent, but simultaneous moves are also often observed. Profit outcomes in the previous period affect the subjects’ decisions to announce or wait in a way that hampers convergence to the equilibrium. Furthermore, while both small and large firms display a strong tendency to wait to announce their price when firm size asymmetry is low, they often set prices early when size asymmetry is high. Prices are higher when price setting is sequential rather than simultaneous and when firm size asymmetry is high. Hence, price leadership by either type of firm has an anti-competitive effect that is more pronounced when the size difference between firms is large.


Capacity constraint Dominant firm Experiment Game of timing 

JEL Classification

L11 L13 C91 


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Supplementary material

10683_2009_9216_MOESM1_ESM.pdf (330 kb)
Appendices A and B


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Copyright information

© Economic Science Association 2009

Authors and Affiliations

  1. 1.Robins School of BusinessUniversity of RichmondRichmondUSA
  2. 2.Department of EconomicsKent State UniversityKentUSA

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