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We're Number 1: Price Wars for Market Share Leadership

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  • Luis Cabral

Abstract

I examine the dynamics of oligopolies when firms derive subjective value from being the market leader. In equilibrium, prices alternate in tandem between high levels and occasional price wars, which take place when market shares are similar and market leadership is at stake. The stationary distribution of market shares is typically multi-modal, that is, much of the time there is a stable market leader. Even though shareholders do not value market leadership per se, a corporate culture that values market leadership may increase shareholder value. From a competition policy point of view, the paper implies that price regime change dynamics and parallel pricing are consistent with competitive behavior -- in fact, hyper-competitive behavior.
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Suggested Citation

  • Luis Cabral, 2014. "We're Number 1: Price Wars for Market Share Leadership," Working Papers 14-01, New York University, Leonard N. Stern School of Business, Department of Economics.
  • Handle: RePEc:ste:nystbu:14-01
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    File URL: http://web-docs.stern.nyu.edu/old_web/economics/docs/workingpapers/2014/Cabral_PriceWars_Jan2014.pdf
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    References listed on IDEAS

    as
    1. Luís Cabral & Gabriel Natividad, 2016. "Box-Office Demand: The Importance of Being #1," Journal of Industrial Economics, Wiley Blackwell, vol. 64(2), pages 277-294, June.
    2. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    3. David Besanko & Ulrich Doraszelski, 2004. "Capacity Dynamics and Endogenous Asymmetries in Firm Size," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 23-49, Spring.
    4. R. E. Caves & M. E. Porter, 1977. "From Entry Barriers to Mobility Barriers: Conjectural Decisions and Contrived Deterrence to New Competition," The Quarterly Journal of Economics, Oxford University Press, vol. 91(2), pages 241-261.
    5. Chaim Fershtman & Ariel Pakes, 2000. "A Dynamic Oligopoly with Collusion and Price Wars," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 207-236, Summer.
    6. Louis Kaplow, 2013. "Competition Policy and Price Fixing," Economics Books, Princeton University Press, edition 1, number 10005, October.
    7. Macleod, W. Bentley, 1985. "A theory of conscious parallelism," European Economic Review, Elsevier, vol. 27(1), pages 25-44, February.
    8. Mark Armstrong & Steffen Huck, 2011. "Behavioral Economics as Applied to Firms: A Primer," Antitrust Chronicle, Competition Policy International, vol. 1.
    9. Paul Klemperer, 1989. "Price Wars Caused by Switching Costs," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 405-420.
    10. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-526, June.
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    Cited by:

    1. Luís Cabral & Gabriel Natividad, 2016. "Box-Office Demand: The Importance of Being #1," Journal of Industrial Economics, Wiley Blackwell, vol. 64(2), pages 277-294, June.

    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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