Price Leadership and Firm Size Asymmetry: An Experimental Analysis

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