Endogenous Price Leadership

Eric van Damme and Sjaak Hurkens

Abstract: We consider a linear price setting duopoly game with differentiated products and determine endogenously which of the players will lead and which one 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: Duopoly, equilibrium selection, risk dominance.

Classification Number: C72, D43.

Games and Economic Behavior, 47(2): 404-420 (2004)