Endogenous Price Leadership
Tilburg University CentER Economics and Business Working Paper No. 581
Posted: 18 Sep 2002
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 Classification: C72, D43
Suggested Citation: Suggested Citation