Endogenous Price Leadership - A Theoretical and Experimental Analysis
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.
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Bibliographic InfoPaper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2013-039.
Date of creation: 20 Sep 2013
Date of revision:
Price leadership; majority voting; bidding; experimental economic;
Find related papers by JEL classification:
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-02 (All new papers)
- NEP-CDM-2013-10-02 (Collective Decision-Making)
- NEP-COM-2013-10-02 (Industrial Competition)
- NEP-EXP-2013-10-02 (Experimental Economics)
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