Paper #289

Title:

Endogenous price leadership

Authors:

Eric van Damme and Sjaak Hurkens

Date:

May 1998

Abstract:

We consider a linear price setting duopoly game with differentiated products and determine endogenously which of the players will lead and which will follow. While the follower role is most attractive for each firm, we show that waiting is more risky for the low cost firm so that, consequently, risk dominance considerations, as in Harsanyi and Selten (1988), allow the conclusion that only the high cost firm will choose to wait. Hence, the low cost firm will emerge as the endogenous price leader.

Keywords:

Price leadership, endogenous timing, risk dominance

JEL codes:

C72, D43

Area of Research:

Microeconomics

Published in:

Games and Economic Behavior, 23, 105-29, 2004

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