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Abstract

This paper considers industries where a firm or group of firms acts as price leader. It shows that entry in such industries can lead to higher prices through a crowding effect. Further, efficiency gains can lead to higher prices by making it too costly to fight. Mergers that bring the merged firms' efficiency close to that of the price leader(s) lead to higher prices if the merged firm does not belong to the group of price leaders. This is a formalization of joint dominance or coordinated effects. Finally, the model is extended to endogenize the identity of the price leader. This is done by allowing firms to make price announcements.

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File URL: http://www.uu.nl/faculty/leg/NL/organisatie/departementen/departementeconomie/onderzoek/publicaties/DParchive/2005/Documents/05-10.pdf
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Bibliographic Info

Paper provided by Utrecht School of Economics in its series Working Papers with number 05-10.

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Length: 39 pages
Date of creation: Mar 2005
Date of revision:
Handle: RePEc:use:tkiwps:0510

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Related research

Keywords: price leadership; mergers; joint dominance; coordinated effects; endogenous price leadership;

Find related papers by JEL classification:

• D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
• L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
• L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

This paper has been announced in the following NEP Reports:

• NEP-ALL-2005-11-05 (All new papers)
• NEP-COM-2005-11-05 (Industrial Competition)
• NEP-MIC-2005-11-05 (Microeconomics)

References

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1. Klette, T.J., 1998. "Market Power, Scale Economies and Productivity: Estimates from a Panel of Establishment Data," Memorandum 15/1998, Oslo University, Department of Economics.
   
   • Klette, Tor Jakob, 1999. "Market Power, Scale Economies and Productivity: Estimates from a Panel of Establishment Data," Journal of Industrial Economics, Wiley Blackwell, vol. 47(4), pages 451-76, December.
2. Stiglitz, Joseph E., 1989. "Imperfect information in the product market," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 13, pages 769-847 Elsevier.
3. Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles," Econometrica, Econometric Society, vol. 56(3), pages 571-99, May.
4. Deneckere, Raymond J & Kovenock, Dan, 1992. "Price Leadership," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 143-62, January.
   
   • Raymond Deneckere & Dan Kovenock, 1988. "Price Leadership," Discussion Papers 773, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
5. Jeremy Bulow & Paul Klemperer, 1999. "Prices and the Winner's Curse," Game Theory and Information 9904003, EconWPA.
   
   • Jeremy Bulow & Paul Klemperer, 2002. "Prices and the Winner's Curse," RAND Journal of Economics, The RAND Corporation, vol. 33(1), pages 1-21, Spring.
6. repec:cup:cbooks:9780521016919 is not listed on IDEAS
7. Rabah Amir & Val E. Lambson, 1998. "On the Effects of Entry in Cournot Markets," CIE Discussion Papers 1998-06, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
   
   • Amir, Rabah & Lambson, Val E, 2000. "On the Effects of Entry in Cournot Markets," Review of Economic Studies, Wiley Blackwell, vol. 67(2), pages 235-54, April.
   • AMIR, Rabah & LAMBSON, Val, 1999. "On the effects of entry in Cournot markets," CORE Discussion Papers 1999059, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
   • Rabah Amir, 2000. "On the Effects of Entry in Cournot Markets," Econometric Society World Congress 2000 Contributed Papers 1475, Econometric Society.
8. Farm, Ante & Weibull, Jorgen W, 1987. " Perfectly Flexible Pricing in a Homogeneous Market," Scandinavian Journal of Economics, Wiley Blackwell, vol. 89(4), pages 487-95.
9. Compte, Olivier & Jenny, François & Rey, Patrick, 2002. "Capacity Constraints, Mergers and Collusion," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
   
   • Compte, Olivier & Jenny, Frederic & Rey, Patrick, 2002. "Capacity constraints, mergers and collusion," European Economic Review, Elsevier, vol. 46(1), pages 1-29, January.
10. Kirman, Alan & Schueller, Nathalie, 1990. "Price Leadership and Discrimination in the European Car Market," Journal of Industrial Economics, Wiley Blackwell, vol. 39(1), pages 69-91, September.
    
    • Kirman, A.P. & Schueller, N., 1990. "Price Leadership And Discrimination In The European Car Market," G.R.E.Q.A.M. 90b02, Universite Aix-Marseille III.
11. Deneckere, Raymond J & Kovenock, Dan & Lee, Robert, 1992. "A Model of Price Leadership Based on Consumer Loyalty," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 147-56, June.
    
    • Deneckere, R. & Kovenock, D. & Lee, R.E., 1988. "A Model of Price Leadership Based on Consumer Loyalty," Purdue University Economics Working Papers 947, Purdue University, Department of Economics.
12. Rotemberg, Julio J & Saloner, Garth, 1990. "Collusive Price Leadership," Journal of Industrial Economics, Wiley Blackwell, vol. 39(1), pages 93-111, September.
13. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-79, September.
14. Ravenscraft, David J, 1983. "Structure-Profit Relationships at the Line of Business and Industry Level," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 22-31, February.
15. Ashenfelter, Orley & Sullivan, Daniel, 1987. "Nonparametric Tests of Market Structure: An Application to the Cigarette Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 483-98, June.

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