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Price Leadership

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  • Raymond Deneckere
  • Dan Kovenock

Abstract

This paper analyzes duopolistic price-leadership games in which firms have capacity constraints. The authors show that when capacities are in the range where the simultaneous-move price-setting game (with efficiently rationed demand) yields a mixed-strategy solution the large firm is indifferent between being a leader, a follower, or moving simultaneously. The small firm, while indifferent between being a leader and moving simultaneously, strictly prefers to be a follower. This motivates the discussion of games of timing with ex post inflexible prices in which the large firm becomes an endogenously determined price leader. The authors, thus, provide a game-theoretic model of dominant-firm price leadership. Copyright 1992 by The Review of Economic Studies Limited.

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Bibliographic Info

Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 773.

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Date of creation: Mar 1988
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Handle: RePEc:nwu:cmsems:773

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Web page: http://www.kellogg.northwestern.edu/research/math/
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  1. Deneckere, R.J. & Kovenock, D., 1994. "Capacity Constrained Price Competition when Unit Costs Differ," Purdue University Economics Working Papers 1056, Purdue University, Department of Economics.
  2. Julio Rotemberg & Garth Saloner, 1986. "Price Leadership," Working papers 412, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Dixon, Huw, 1987. "The General Theory of Household and Market Contingent Demand," The Manchester School of Economic & Social Studies, University of Manchester, vol. 55(3), pages 287-304, September.
  4. Raymond Deneckere & Dan Kovenock, 1988. "Price Leadership," Discussion Papers 773, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Ono, Yoshiyasu, 1978. "The Equilibrium of Duopoly in a Market of Homogeneous Goods," Economica, London School of Economics and Political Science, vol. 45(179), pages 287-95, August.
  6. Dixon, Huw, 1987. "Approximate Bertrand Equilibria in a Replicated Industry," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 47-62, January.
  7. Davidson, Carl & Deneckere, Raymond J, 1990. "Excess Capacity and Collusion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 521-41, August.
  8. Osborne, Martin J. & Pitchik, Carolyn, 1986. "Price competition in a capacity-constrained duopoly," Journal of Economic Theory, Elsevier, vol. 38(2), pages 238-260, April.
  9. Ono, Yoshiyasu, 1982. "Price Leadership: A Theoretical Analysis," Economica, London School of Economics and Political Science, vol. 49(193), pages 11-20, February.
  10. Richard E. Levitan & Martin Shubik, 1970. "Price Duopoly and Capacity Constraints," Cowles Foundation Discussion Papers 287, Cowles Foundation for Research in Economics, Yale University.
  11. Benoit, Jean-Pierre & Krishna, Vijay, 1987. "Dynamic Duopoly: Prices and Quantities," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 23-35, January.
  12. Steve Dowrick, 1986. "von Stackelberg and Cournot Duopoly: Choosing Roles," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 251-260, Summer.
  13. Brock, William A & Scheinkman, Jose A, 1985. "Price Setting Supergames with Capacity Constraints," Review of Economic Studies, Wiley Blackwell, vol. 52(3), pages 371-82, July.
  14. Gal-Or, Esther, 1985. "First Mover and Second Mover Advantages," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 649-53, October.
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