Abstract
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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