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Endogenous price leadership. (English) Zbl 1077.91013
Summary: 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 J. C. Harsanyi and R. Selten [A general theory of equilibrium selection in games, MIT Press, Cambridge, MA (1988; Zbl 0693.90098)], 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.

MSC:
91A80 Applications of game theory
91A10 Noncooperative games
91B26 Auctions, bargaining, bidding and selling, and other market models
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