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How Applicable is the Dominant Firm Model of Price Leadership?

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Author Info

  • Stephen J. Rassenti

    ()

  • Bart J. Wilson

    ()

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.

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Bibliographic Info

Article provided by Springer in its journal Experimental Economics.

Volume (Year): 7 (2004)
Issue (Month): 3 (October)
Pages: 271-288

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Handle: RePEc:kap:expeco:v:7:y:2004:i:3:p:271-288

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Web page: http://www.springerlink.com/link.asp?id=102888

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Cited by:
  1. Attila Tasnádi, 2010. "Quantity-setting games with a dominant firm," Journal of Economics, Springer, vol. 99(3), pages 251-266, April.
  2. Dean V. Williamson & Céline Jullien & Lynne Kiesling & Carine Staropoli, 2006. "Investment Incentives and Market Power: An Experimental Analysis," EAG Discussions Papers 200605, Department of Justice, Antitrust Division.
  3. Ahmad Reza Saboori Memar, 2013. "Profitable Entry into an Unprofitable Market," MAGKS Papers on Economics 201306, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  4. Shakun Datta Mago & Emmanuel Dechenaux, 2009. "Price leadership and firm size asymmetry: an experimental analysis," Experimental Economics, Springer, vol. 12(3), pages 289-317, September.

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