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Price competition or price leadership

Makoto Yano () and Takashi Komatsubara ()
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Makoto Yano: 1-3-1 Kasumigaseki
Takashi Komatsubara: Japan Fair Trade Commission

Economic Theory, 2018, vol. 66, issue 4, 1023-1057

Abstract: Abstract Every now and then, we observe a fierce price war in a real world market, through which competing firms, selling a homogenous product, end up with Bertrand-like price competition. Despite this, not much has been known in the existing literature as to why a price competition market is formed. We address this question in the context of a choice between engaging in price competition and holding a price leader. Focusing on a duopoly market, we demonstrate that if the market is tight (or if the relative size of demand to supply exceeds a threshold value) and if the cost differential between firms is reasonably large, duopoly firms choose to engage in price competition. Otherwise, one firm becomes a price leader while the other firm a price follower.

Keywords: Price competition; Price leader; Market organization game; Duopoly (search for similar items in EconPapers)
JEL-codes: D21 D43 L11 L13 (search for similar items in EconPapers)
Date: 2018
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