Price leadership and asymmetric price rigidity

In this paper we present a simple price leadership model in which equilibrium behavior exhibits price rigidity following downward demand shocks and price flexibility after an upturn in demand. The source of this asymmetric rigidity lies in the fact that leader-follower equilibrium prices are lower t...

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Bibliographic Details
Published inEuropean Journal of Political Economy Vol. 14; no. 1; pp. 167 - 187
Main Authors Kovenock, Dan, Widdows, Kealoha
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.02.1998
Elsevier
SeriesEuropean Journal of Political Economy
Subjects
Equilibrium models
Games of timing
Leadership
Political Economy
Price leadership
Price rigidity
Price theory
Prices
Pricing
Price leadership
L16
Price rigidity
Games of timing
D43
E32
L13
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Summary:In this paper we present a simple price leadership model in which equilibrium behavior exhibits price rigidity following downward demand shocks and price flexibility after an upturn in demand. The source of this asymmetric rigidity lies in the fact that leader-follower equilibrium prices are lower than their collusive levels and that any firm leading a round of price adjustment must anticipate the optimal price response of the follower. In addition, we find that there is a range of shocks, both positive and negative, in which the identity of the price leader is endogenous; the previous price leader is the only firm that prefers leading a round of price setting to keeping the status quo.
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ISSN:0176-2680
1873-5703
DOI:10.1016/S0176-2680(97)00043-8