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Price leadership and firm size asymmetry: an experimental analysis

Published online by Cambridge University Press:  14 March 2025

Shakun Datta Mago  and
Emmanuel Dechenaux
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
*
e-mail: [email protected]
e-mail: [email protected]
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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.

Keywords

Capacity constraintDominant firmExperimentGame of timing

JEL classification

C91: Laboratory, Individual Behavior L11: Production, Pricing, and Market Structure • Size Distribution of Firms L13: Oligopoly and Other Imperfect Markets
Type
Research Article
Information
Experimental Economics , Volume 12 , Issue 3 , September 2009 , pp. 289 - 317
Copyright
Copyright © Economic Science Association 2009

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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.

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