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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