Price Leadership and Firm Size Asymmetry: An Experimental Analysis

Posted: 23 Aug 2007

See all articles by Shakun D. Mago

Shakun D. Mago

University of Richmond - E. Claiborne Robins School of Business

Emmanuel Dechenaux

Kent State University - Department of Economics

Date Written: May 11, 2007

Abstract

We use laboratory experiments to examine the effect of firm size asymmetry on the emergence of price leadership in a capacity constrained price-setting duopoly. With discounting, the unique subgame perfect equilibrium of the timing game we analyze predicts that the large firm is an endogenous price leader. In the experiment, independent of the level of size asymmetry, price leadership by the large firm is one of the most frequently observed timings of price announcements. Overall, the large firm is more likely to set its price early than the small firm. However, in nearly symmetric duopolies, both small and large firms display a strong tendency to wait to announce their price. As a consequence, simultaneous price setting is frequent. Finally, we find that prices are higher when firms set prices sequentially rather than simultaneously and when the level of size asymmetry between the firms is high.

Keywords: Capacity constraint, Dominant firm, Experiment, Game of timing

JEL Classification: L11, L13, C91

Suggested Citation

Mago, Shakun Datta and Dechenaux, Emmanuel, Price Leadership and Firm Size Asymmetry: An Experimental Analysis (May 11, 2007). Available at SSRN: https://ssrn.com/abstract=1007095

Shakun Datta Mago

University of Richmond - E. Claiborne Robins School of Business ( email )

Richmond, VA 23173
United States

Emmanuel Dechenaux (Contact Author)

Kent State University - Department of Economics ( email )

Kent, OH 44242
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
643
PlumX Metrics