Endogenous price leadership – A theoretical and experimental analysis

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe present a model of price leadership on homogeneous product markets where the price leader is selected endogenously. The price leader sets and guarantees a sales price to which followers can adjust according to their individual supply functions.The price leader then clears the market by serving the residual demand. Firms with different marginal costs would induce different prices if they were price leaders.Somewhat counter-intuitively, lower marginal costs of the leader imply higher prices.We compare two mechanisms to determine the price leader in a between-subjects design, majority voting and competitive bidding. The experimental data of later rounds support our theoretical finding that experienced price leaders with lower marginal costs choose higher prices. In the majority voting treatment, participants with higher marginal costs more often establish the lowest cost competitor as price leader in order to induce a higher sales price.

Identifying price-leadership structures in oligopoly

“…While this theoretical literature extends beyond duopoly, such as examining triopolies (Güth et al 2014;Tasnádi 2016), the common approach is on the emergence of one price leader (or a colluding group) and all other firms acting as direct price followers. To our knowledge, this paper is the first to show how there can be an endogenously determined succession of firms setting prices in an n-firm oligopoly, such that one might lead, followed by a rival, but with that rival then followed by a further rival, and so on, in a hierarchical structure with a cascading sequence of price choices.…”