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Endogenous price leadership: A theoretical and experimental analysis

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  • Güth, Werner
  • Pull, Kerstin
  • Stadler, Manfred
  • Zaby, Alexandra

Abstract

We 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 adjust according to their individual supply functions. The price leader clears the market by serving the residual demand. As price leaders, firms with different marginal costs induce different prices. We compare two mechanisms to determine the price leader, majority voting and competitive bidding. According to the experimental data at least experienced price leaders with lower marginal costs choose higher prices. In the bidding treatment, compensation payments to the price leader crowd in efficiency concerns.

Suggested Citation

  • Güth, Werner & Pull, Kerstin & Stadler, Manfred & Zaby, Alexandra, 2014. "Endogenous price leadership: A theoretical and experimental analysis," University of Tuebingen Working Papers in Economics and Finance 68, University of Tuebingen, Faculty of Economics and Social Sciences.
  • Handle: RePEc:zbw:tuewef:68
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    References listed on IDEAS

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    1. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384.
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    More about this item

    Keywords

    price leadership; majority voting; bidding; experimental economics;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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