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Endogenous Price Leadership - A Theoretical and Experimental Analysis

Werner Güth (), Kerstin Pull, Manfred Stadler and Alexandra Zaby ()

No 2013-039, Jena Economic Research Papers from Friedrich-Schiller-University Jena

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 can adjust according to their individual supply functions. The price leader then clears the market by serving the residual demand. Firms with different marginal costs would induce different prices if they were price leaders. Somewhat counter-intuitively, lower marginal costs of the leader imply higher prices. We compare two mechanisms to determine the price leader in a between-subjects design, majority voting and competitive bidding. The experimental data of later rounds support our theoretical finding that experienced price leaders with lower marginal costs choose higher prices. In the majority voting treatment, participants with higher marginal costs more often establish the lowest cost competitor as price leader in order to induce a higher sales price.

Keywords: Price leadership; majority voting; bidding; experimental economic (search for similar items in EconPapers)
JEL-codes: D43 D74 L11 (search for similar items in EconPapers)
Date: 2013-09-20
New Economics Papers: this item is included in nep-cdm, nep-com and nep-exp
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Journal Article: Endogenous price leadership – A theoretical and experimental analysis (2014) Downloads
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