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How Applicable is the Dominant Firm Model of Price Leadership?

Published online by Cambridge University Press:  14 March 2025

Stephen J. Rassenti  and
Bart J. Wilson
Stephen J. Rassenti*
Affiliation:
Interdisciplinary Center for Economic Science, George Mason University, 4400 University Drive, MSN 1B2, Fairfax, VA 22030, USA
Bart J. Wilson*
Affiliation:
Interdisciplinary Center for Economic Science, George Mason University, 4400 University Drive, MSN 1B2, Fairfax, VA 22030, USA
*
email: [email protected]
email: [email protected]
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Abstract

In this paper, we examine the usefulness of the dominant firm model of price leadership to serve as a benchmark for organizing behavior in laboratory markets. This well established model, whose origins can be traced back over a hundred years, has been recently applied to such landmark antitrust cases as Standard Oil and Alcoa and more recently to the analysis of deregulated markets for electric power. Our results indicate that in posted offer markets the dominant firm quite often produces more than the model's benchmark and sometimes at much greater prices. With sealed offer auction rules and a low elasticity of fringe supply, the dominant firm produces the theoretical output at a price greater than the prediction. However, with a high elasticity of fringe supply, the dominant firm produces more output over a wide range of prices that includes the predicted price.

Keywords

dominant firmelectric power deregulationexperimental economics

JEL classification

L11: Production, Pricing, and Market Structure • Size Distribution of Firms C92: Laboratory, Group Behavior
Type
Research Article
Information
Experimental Economics , Volume 7 , Issue 3 , October 2004 , pp. 271 - 288
Copyright
Copyright © 2004 Economic Science Association

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