Price Leadership

Raymond J. Deneckere and Dan Kovenock

The Review of Economic Studies, 1992, vol. 59, issue 1, 143-162

Abstract: This paper analyzes duopolistic price-leadership games in which firms have capacity constraints. We provide a complete characterization of price leader equilibria under quite general assumptions on demand and for arbitrary capacities. We 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. We thus provide a game-theoretic model of dominant-firm price leadership.

Date: 1992
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Working Paper: Price Leadership (1988)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:59:y:1992:i:1:p:143-162.

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