Price leadership and firm size asymmetry: an experimental analysis
- 168 Downloads
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.
KeywordsCapacity constraint Dominant firm Experiment Game of timing
JEL ClassificationL11 L13 C91
Unable to display preview. Download preview PDF.
- Deneckere, R., & Kovenock, D. (1988). Price leadership (Working Paper No. 773). Department of Managerial Economics and Decision Sciences, Northwestern University. Google Scholar
- Duffy, J., & Ochs, J. (2008, forthcoming) Cooperative behavior and the frequency of social interaction. Games and Economic Behavior, Google Scholar
- Ghemawat, P. (1986). Capacities and prices: a model with applications (Harvard Business School Working Paper). Google Scholar
- Markham, J. (1951). The nature and significance of price leadership. American Economic Review, 41, 891–905. Google Scholar
- Rotemberg, J., & Saloner, G. (1990). Collusive price leadership. Journal of Industrial Economics, 104, 73–97. Google Scholar
- Waldman, D., & Jensen, E. (2001). Industrial organization: theory and practice. Reading: Addison-Wesley. Google Scholar