Low-Cost-Driven Leadership: A Theory for Price Dispersion in Competitive Markets

We consider markets where a large number of firms offer homogeneous products. Despite the competitive nature of these markets, there is extensive practical evidence for the price dispersion phenomenon, i.e., the homogeneous products are sold at different prices. We propose a new theory to explain th...

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Bibliographic Details
Published inInternational Journal of Business and Economics Vol. 19; no. 1; pp. 061 - 076
Main Author Gheibi, Shahryar
Format Journal Article
LanguageEnglish
Published 台灣 逢甲大學 01.01.2020
International Journal of Business and Economics
Subjects
Competition
Consumers
cost advantage
Costs
E-books
Equilibrium
Game theory
homogeneous-product market
Leadership
Market prices
price dispersion
Profits
Researchers
Studies
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Summary:We consider markets where a large number of firms offer homogeneous products. Despite the competitive nature of these markets, there is extensive practical evidence for the price dispersion phenomenon, i.e., the homogeneous products are sold at different prices. We propose a new theory to explain this phenomenon. Our game-theoretical model indicates that the existence of price leadership driven by the low-cost advantage results in persistent and large price dispersion. Furthermore, we show that the market leader and all followers (with one exception) are able to make positive profits in such competitive markets, which explains the remarkable co-existence of a large number of firms in homogeneous-product markets. Finally, our results indicate that the leader has to lower her price as followers become more efficient in the interests of gaining higher profits, resulting in a wider range of prices and, thus, a larger degree of price dispersion.
ISSN:1607-0704