Skip to main content
SpringerLink
Log in

Price leadership and firm size asymmetry: an experimental analysis

  • Published:
Experimental Economics Aims and scope Submit manuscript

Abstract

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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Abrevaya, J. (2008). On recombinant estimation for experimental data. Experimental Economics, 11, 25–52.

    Article  Google Scholar 

  • Bain, J. (1960). Price leaders, barometers, and kinks. Journal of Business, 33, 193–203.

    Article  Google Scholar 

  • Boyer, M., & Moreaux, M. (1987). Being a leader or a follower: reflections on the distribution of roles in duopoly. International Journal of Industrial Organization, 5, 175–192.

    Article  Google Scholar 

  • Boyer, M., & Moreaux, M. (1988). Rational rationing in Stackelberg equilibria. Quarterly Journal of Economics, 103, 409–414.

    Article  Google Scholar 

  • Brown Kruse, J. (1991). Contestability in the presence of an alternate market: an experimental examination. RAND Journal of Economics, 22, 136–147.

    Article  Google Scholar 

  • Cason, T. (1995). Cheap talk price signaling in laboratory markets. Information Economics and Policy, 7, 183–204.

    Article  Google Scholar 

  • Cooper, R., DeJong, D. V., Forsythe, R., & Ross, T. W. (1992). Communication in coordination games. Quarterly Journal of Economics, 107, 739–771.

    Article  Google Scholar 

  • Cox, J., Friedman, D., & Sadiraj, V. (2008). Revealed altruism. Econometrica, 76, 31–69.

    Article  Google Scholar 

  • Crawford, V. (1998). A survey of experiments on communication via cheap talk. Journal of Economic Theory, 78, 286–298.

    Article  Google Scholar 

  • Deneckere, R., & Kovenock, D. (1988). Price leadership (Working Paper No. 773). Department of Managerial Economics and Decision Sciences, Northwestern University.

  • Deneckere, R., & Kovenock, D. (1992). Price leadership. Review of Economic Studies, 59, 143–162.

    Article  Google Scholar 

  • Deneckere, R., Kovenock, D., & Lee, R. (1992). A model of price leadership based on consumer loyalty. Journal of Industrial Economics, 40, 147–156.

    Article  Google Scholar 

  • Dowrick, S. (1986). von Stackelberg and Cournot duopoly: choosing roles. RAND Journal of Economics, 17, 251–260.

    Article  Google Scholar 

  • Duffy, J., & Ochs, J. (2008, forthcoming) Cooperative behavior and the frequency of social interaction. Games and Economic Behavior,

  • Eckard, E. (1982). Firm market share, price flexibility, and imperfect information. Economic Inquiry, 20, 388–392.

    Article  Google Scholar 

  • Fischbacher, U. (2007). Z-tree 2.1: Zurich toolbox for readymade economic experiments. Experimental Economics, 10, 171–178.

    Article  Google Scholar 

  • Fonseca, M., Huck, S., & Normann, H.-T. (2005). Playing Cournot although they shouldn’t: endogenous timing in experimental duopolies with asymmetric cost. Economic Theory, 25, 669–677.

    Article  Google Scholar 

  • Fonseca, M., Müller, W., & Normann, H.-T. (2006). Endogenous timing in duopoly: experimental evidence. International Journal of Game Theory, 34, 443–456.

    Article  Google Scholar 

  • Gal-Or, E. (1985). First mover and second mover advantages. International Economic Review, 25, 649–653.

    Article  Google Scholar 

  • Ghemawat, P. (1986). Capacities and prices: a model with applications (Harvard Business School Working Paper).

  • Hamilton, J., & Slutsky, S. (1990). Endogenous timing in duopoly games: Stackelberg or Cournot equilibria. Games and Economic Behavior, 2, 29–46.

    Article  Google Scholar 

  • Holthausen, D. M. (1979). Kinky demand, risk aversion, and price leadership. International Economic Review, 20, 341–348.

    Article  Google Scholar 

  • Huck, S., Müller, W., & Normann, H.-T. (2001). Stackelberg beats Cournot: on collusion and efficiency in experimental markets. The Economic Journal, 111, 749–761.

    Article  Google Scholar 

  • Huck, S., Müller, W., & Normann, H.-T. (2002). To commit or not to commit: endogenous timing in experimental duopoly markets. Games and Economic Behavior, 38, 240–264.

    Article  Google Scholar 

  • Huck, S., Konrad, K., Müller, W., & Normann, H.-T. (2007). The Merger paradox and why aspiration levels let it fail in the laboratory. Economic Journal, 117, 1073–1095.

    Article  Google Scholar 

  • Ishibashi, I. (2008). Collusive price leadership with capacity constraints. International Journal of Industrial Organization, 26, 704–715.

    Article  Google Scholar 

  • Kübler, D., & Müller, W. (2002). Simultaneous and sequential price competition in heterogeneous duopoly markets: experimental evidence. International Journal of Industrial Organization, 20, 1437–1460.

    Article  Google Scholar 

  • Landes, W., & Posner, R. (1981). Market power in antitrust cases. Harvard Law Review, 94, 937–996.

    Article  Google Scholar 

  • Markham, J. (1951). The nature and significance of price leadership. American Economic Review, 41, 891–905.

    Google Scholar 

  • Marshall, R., Marx, L., & Raiff, M. (2008). Cartel price announcements: the vitamins industry. International Journal of Industrial Organization, 26, 762–802.

    Article  Google Scholar 

  • Mason, C., Philips, O., & Nowell, C. (1992). Duopoly behavior in asymmetric markets: an experimental evaluation. Review of Economics and Statistics, 74, 662–670.

    Article  Google Scholar 

  • Mueller, W., Marion, B., & Sial, M. (1997). Price leadership on the national cheese exchange. Review of Industrial Organization, 12, 145–170.

    Article  Google Scholar 

  • Pastine, I., & Pastine, T. (2004). Cost of delay and endogenous price leadership. International Journal of Industrial Organization, 22, 135–145.

    Article  Google Scholar 

  • Puzzello, D. (2008). Tie-breaking rules and divisibility in experimental duopoly markets. Journal of Economic Behavior and Organization, 67, 164–179.

    Article  Google Scholar 

  • Rassenti, A., & Wilson, B. (2004) How applicable is the dominant firm model of price leadership? Experimental Economics, 7, 271–288.

    Article  Google Scholar 

  • Rotemberg, J., & Saloner, G. (1990). Collusive price leadership. Journal of Industrial Economics, 104, 73–97.

    Google Scholar 

  • Santos-Pinto, L. (2008). Making sense of the experimental evidence on endogenous timing in duopoly markets. Journal of Economic Behavior and Organization, 68, 657–666.

    Article  Google Scholar 

  • Stigler, G. (1947). The kinky oligopoly demand curve and rigid price. Journal of Political Economy, 55, 432–449.

    Article  Google Scholar 

  • Tykocinski, O., & Ruffle, B. (2003). Reasonable reasons for waiting. Journal of Behavioral Decision Making, 16, 147–157.

    Article  Google Scholar 

  • van Damme, E., & Hurkens, S. (2004). Endogenous price leadership. Games and Economic Behavior, 47, 404–420.

    Article  Google Scholar 

  • Waldman, D., & Jensen, E. (2001). Industrial organization: theory and practice. Reading: Addison-Wesley.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Robins School of Business, University of Richmond, 1 Gateway Road, Richmond, VA, 23173, USA

    Shakun Datta Mago

  2. Department of Economics, Kent State University, Kent, OH, 44242, USA

    Emmanuel Dechenaux

Authors
  1. Shakun Datta Mago
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Emmanuel Dechenaux
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Emmanuel Dechenaux.

Electronic Supplementary Material

Rights and permissions

Reprints and permissions

About this article

Cite this article

Datta Mago, S., Dechenaux, E. Price leadership and firm size asymmetry: an experimental analysis. Exp Econ 12, 289–317 (2009). https://doi.org/10.1007/s10683-009-9216-x

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10683-009-9216-x

Keywords

JEL Classification

Search

Navigation