Price leadership with promotions

Abstract

I introduce and analyze a framework of price leadership that incorporates an important feature of a modern retail industry, namely that firms commit to a promotion calendar. In my model, a leader commits to such a calendar in the form of a price distribution, and a follower responds to this strategy. I derive the leader’s optimal price distribution and show that it forces the follower to charge the highest possible price. In contrast to the standard Bertrand outcome, both firms earn positive profits. The framework is extended to incorporate loyal consumers, capacity constraints, and asymmetric costs.