Hostname: page-component-7b9c58cd5d-g9frx Total loading time: 0 Render date: 2025-03-16T13:15:56.579Z Has data issue: false hasContentIssue false

Price leadership and firm size asymmetry: an experimental analysis

Published online by Cambridge University Press:  14 March 2025

Shakun Datta Mago*
Affiliation:
Robins School of Business, University of Richmond, 1 Gateway Road, Richmond, VA 23173, USA
Emmanuel Dechenaux*
Affiliation:
Department of Economics, Kent State University, Kent, OH 44242, USA

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.

Type
Research Article
Copyright
Copyright © Economic Science Association 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

Electronic supplementary material The online version of this article (http://dx.doi.org/10.1007/s10683-009-9216-x) contains supplementary material, which is available to authorized users.

References

Abrevaya, J. (2008). On recombinant estimation for experimental data. Experimental Economics, 11, 2552.CrossRefGoogle Scholar
Bain, J. (1960). Price leaders, barometers, and kinks. Journal of Business, 33, 193203.CrossRefGoogle 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, 175192.CrossRefGoogle Scholar
Boyer, M., & Moreaux, M. (1988). Rational rationing in Stackelberg equilibria. Quarterly Journal of Economics, 103, 409414.CrossRefGoogle Scholar
Brown Kruse, J. (1991). Contestability in the presence of an alternate market: an experimental examination. RAND Journal of Economics, 22, 136147.CrossRefGoogle Scholar
Cason, T. (1995). Cheap talk price signaling in laboratory markets. Information Economics and Policy, 7, 183204.CrossRefGoogle Scholar
Cooper, R., DeJong, D. V., Forsythe, R., & Ross, T. W. (1992). Communication in coordination games. Quarterly Journal of Economics, 107, 739771.CrossRefGoogle Scholar
Cox, J., Friedman, D., & Sadiraj, V. (2008). Revealed altruism. Econometrica, 76, 3169.CrossRefGoogle Scholar
Crawford, V. (1998). A survey of experiments on communication via cheap talk. Journal of Economic Theory, 78, 286298.CrossRefGoogle Scholar
Deneckere, R., & Kovenock, D. (1988). Price leadership (Working Paper No. 773). Department of Managerial Economics and Decision Sciences, Northwestern University.Google Scholar
Deneckere, R., & Kovenock, D. (1992). Price leadership. Review of Economic Studies, 59, 143162.CrossRefGoogle Scholar
Deneckere, R., Kovenock, D., & Lee, R. (1992). A model of price leadership based on consumer loyalty. Journal of Industrial Economics, 40, 147156.CrossRefGoogle Scholar
Dowrick, S. (1986). von Stackelberg and Cournot duopoly: choosing roles. RAND Journal of Economics, 17, 251260.CrossRefGoogle Scholar
Duffy, J., & Ochs, J. (2008, forthcoming) Cooperative behavior and the frequency of social interaction. Games and Economic Behavior.CrossRefGoogle Scholar
Eckard, E. (1982). Firm market share, price flexibility, and imperfect information. Economic Inquiry, 20, 388392.CrossRefGoogle Scholar
Fischbacher, U. (2007). Z-tree 2.1: Zurich toolbox for readymade economic experiments. Experimental Economics, 10, 171178.CrossRefGoogle 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, 669677.CrossRefGoogle Scholar
Fonseca, M., Müller, W., & Normann, H.-T. (2006). Endogenous timing in duopoly: experimental evidence. International Journal of Game Theory, 34, 443456.CrossRefGoogle Scholar
Gal-Or, E. (1985). First mover and second mover advantages. International Economic Review, 25, 649653.Google Scholar
Ghemawat, P. (1986). Capacities and prices: a model with applications (Harvard Business School Working Paper).Google Scholar
Hamilton, J., & Slutsky, S. (1990). Endogenous timing in duopoly games: Stackelberg or Cournot equilibria. Games and Economic Behavior, 2, 2946.CrossRefGoogle Scholar
Holthausen, D. M. (1979). Kinky demand, risk aversion, and price leadership. International Economic Review, 20, 341348.CrossRefGoogle Scholar
Huck, S., Müller, W., & Normann, H.-T. (2001). Stackelberg beats Cournot: on collusion and efficiency in experimental markets. The Economic Journal, 111, 749761.CrossRefGoogle 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, 240264.CrossRefGoogle 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, 10731095.CrossRefGoogle Scholar
Ishibashi, I. (2008). Collusive price leadership with capacity constraints. International Journal of Industrial Organization, 26, 704715.CrossRefGoogle Scholar
Kübler, D., & Müller, W. (2002). Simultaneous and sequential price competition in heterogeneous duopoly markets: experimental evidence. International Journal of Industrial Organization, 20, 14371460.CrossRefGoogle Scholar
Landes, W., & Posner, R. (1981). Market power in antitrust cases. Harvard Law Review, 94, 937996.CrossRefGoogle Scholar
Markham, J. (1951). The nature and significance of price leadership. American Economic Review, 41, 891905.Google Scholar
Marshall, R., Marx, L., & Raiff, M. (2008). Cartel price announcements: the vitamins industry. International Journal of Industrial Organization, 26, 762802.CrossRefGoogle Scholar
Mason, C., Philips, O., & Nowell, C. (1992). Duopoly behavior in asymmetric markets: an experimental evaluation. Review of Economics and Statistics, 74, 662670.CrossRefGoogle Scholar
Mueller, W., Marion, B., & Sial, M. (1997). Price leadership on the national cheese exchange. Review of Industrial Organization, 12, 145170.CrossRefGoogle Scholar
Pastine, I., & Pastine, T. (2004). Cost of delay and endogenous price leadership. International Journal of Industrial Organization, 22, 135145.CrossRefGoogle Scholar
Puzzello, D. (2008). Tie-breaking rules and divisibility in experimental duopoly markets. Journal of Economic Behavior and Organization, 67, 164179.CrossRefGoogle Scholar
Rassenti, A., & Wilson, B. (2004) How applicable is the dominant firm model of price leadership? Experimental Economics, 7, 271288.CrossRefGoogle Scholar
Rotemberg, J., & Saloner, G. (1990). Collusive price leadership. Journal of industrial Economics, 104, 7397.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, 657666.CrossRefGoogle Scholar
Stigler, G. (1947). The kinky oligopoly demand curve and rigid price. Journal of Political Economy, 55, 432449.CrossRefGoogle Scholar
Tykocinski, O., & Ruffle, B. (2003). Reasonable reasons for waiting. Journal of Behavioral Decision Making, 16, 147157.CrossRefGoogle Scholar
van Damme, E., & Hurkens, S. (2004). Endogenous price leadership. Games and Economic Behavior, 47, 404420.CrossRefGoogle Scholar
Waldman, D., & Jensen, E. (2001). Industrial organization: theory and practice. Reading: Addison- Wesley.Google Scholar
Supplementary material: File

Mago and Dechenaux supplementary material

Appendices A and B
Download Mago and  Dechenaux supplementary material(File)
File 337.8 KB