Price Leadership Model Research Articles

ВЛИЯНИЕ ОЛИГОПОЛИСТИЧЕСКОЙ КОНКУРЕНЦИИ НА ЭКОНОМИКУ СТРАНЫ

This paper studies the essence and significance of one of the components of imperfect competition – oligopoly. In the course of writing the paper, the main specific features of oligopoly that distinguish it from monopoly and monopolistic competition have been identified. In addition, the main conditions of its emergence were noted, with the allocation of varieties of the category under consideration. An important place in the study was given to the main models of oligopoly, in particular: price leadership model, Bertrand model, cartel model and Cournot model. In addition, a comparative analysis was conducted to identify the positive and negative sides of the existence of oligopoly. Undoubtedly, the topic of our research is very relevant at the current stage of economic development. This is primarily due to the fact that oligopoly acts as one of the most common market structures. After all, almost all technically complex industries belong to oligopoly, in particular such industries as metallurgy, electronics, automobile manufacturing and many others.

A price leadership model for merger analysis

We provide a methodology to simulate the coordinated effects of a proposed merger using data commonly available to antitrust authorities. The model follows the price leadership structure in Miller, Sheu, and Weinberg (2021) in an environment with logit or nested logit demand. The model calibration leverages profit margin data to separately identify the extent of coordinated pricing from marginal costs. Using this framework, we demonstrate how mergers can shift incentive compatibility constraints and thereby lead to adverse competitive effects. The incentive compatibility constraints also affect the extent to which cost efficiencies and divestitures mitigate competitive harms.

An Economic Model of Tiered Spectrum Access

This paper develops a theoretical economic framework with the purpose of evaluating the optimal allocation of frequency space between licensed and unlicensed agents. We explore a dominant firm price leadership model where broader property rights over spectrum may be purchased while a competitive fringe enjoys free common access to a different set of frequencies, though with no assurance of protection against interference. The standard model is extended here in two new directions by simultaneously introducing congestion in production activities and quality differentials in output. Our paper describes the corresponding equilibrium pricing decisions and sets the conditions under which a dominant firm and a competitive fringe may co-exist in the market. The regulator plays a key role in these results by determining the optimal share of frequency space assigned to licensed and unlicensed spectrum access, with a view to maximize either consumer welfare or total economic surplus. This allocation choice is shown to depend on a variety of economic and technical parameters, like market scale, cost differentials between firms, product quality and power caps aimed at reducing interference. These insights are relevant in light of the current plans of the Federal Communications Commission for the development of the 3.5 GHz band, envisioned as a low-powered, multi-tiered hierarchical access system.

Interest banking spreads in Oman and Arab GCC

PurposeAverage bank net interest margins vary widely across Gulf Cooperation Council (GCC) countries, net interest margins of Omani banks are significantly higher. The resultant low level of financial intermediation implies reduced investment and economic growth. Understanding the reason for these high and persistent spreads is important to develop a policy for improving effectiveness of the banking system. The paper aims to discuss these issues.Design/methodology/approachNet interest margins of Arab GCC banks during the period 1999-2012 are examined using the balanced panel regression model with bank specific, financial/market structure specific and macroeconomic factors as determinants. The method used for estimation used is the estimated generalized least squares (EGLS) method with both fixed effects and random effects.FindingsBank-specific variables, which explain net interest margins in GCC, are bank capitalization ratios, loan ratios and overhead expenses. Spread of banking sector (as measured by ratio of total bank credit to GDP) is positive and highly significant, implying that along with the expansion of the banking sector in GCC economies, interest margins of banks also improved. Omani banks were able to increase interest margins by aggressively marketing high yield personal and credit card loans, and, zero interest paying deposit products. The study also finds a negative relationship between concentration and net interest margin, and attempts to explain this finding which is at variance with other country studies using the price leadership model of oligopoly.Research limitations/implicationsThe standard, accepted econometric model of net interest margins which has been used in earlier studies is unable to explain the high net interest margins of banks in Oman although it is able to explain interest margins in other GCC countries. There is a need to develop non econometric models. More work is needed on the implications of NIM spreads for how they affect an economy.Practical implicationsThe study shows that as the banking sector spreads in the economy, individual banks have more opportunities to market their products while at the same time maintaining interest margins. Bank managements should note this point and look for opportunities to expand.Originality/valueThere is no evidence of any empirical studies which focused on net interest margins in the GCC countries. This study attempts to fill in this gap with a view to nudge policy makers to look at the issue of high interest margins and its detrimental impact on economic growth and development in the Gulf region. The paper is useful for policy makers to understand and rectify the problem of excessive interest spreads which is hurting the financial intermediation process.

The Persistence of Dominant‐Firm Market Share: Raising Rivals' Cost on the New York Stock Exchange

To explain the persistence of dominant New York Stock Exchange (NYSE) market share in stock trading of listed securities from 1992 to 2002, we develop a dominant‐firm price leadership model and hypothesize that NYSE specialists raised the costs of rival market makers. The model predicts that natural and induced cost advantages will determine the NYSE's market share vis‐à‐vis the regional exchanges, electronic trading systems, and NASDAQ dealers. Empirically, NYSE market share increases with economies of scale and scope, abnormal price volatility, high asymmetric information, and with trading practices that raise rivals' costs, such as failure to display limit orders that bettered the existing quotes.

Does Anti-dumping Enforcement Generate Threat?

The last two decades have witnessed that countries across the world are guided by the rules and regulations of multilateral trading institutions (for example, World Trade Organization [WTO], International Monetary Fund [IMF]) in order to promote free and fair trade through gradual reduction in trade barriers. The world economy has noticed significant reduction in tariffs, yet we find a rise in non-tariff barriers (NTBs). However, we still find dumping and few other trade strategies of the exporting countries as a major hindrance to free and fair trade. Such behaviour has led to ‘contingent protection’ as a tool of new-protectionism. Among the contingent protection measures, anti-dumping (AD) has evolved as the most popular choice of strategy for the trading nations. The AD policy invokes a threat to the exporter and thereby can change its strategic behaviour. We describe the phenomenon of dumping through a price-leadership model and thereby compute the optimal level of AD duty that can offset dumping. Using a sequential game, we conclude that the credible threat of an AD duty restricts dumping and thereby leads to a win-win situation for both the foreign and domestic firms.

Endogenous price leadership – A theoretical and experimental analysis

We present a model of price leadership on homogeneous product markets where the price leader is selected endogenously. The price leader sets and guarantees a sales price to which followers adjust according to their individual supply functions. The price leader clears the market by serving the residual demand. As price leaders, firms with different marginal costs induce different prices. We compare two mechanisms to determine the price leader, majority voting and competitive bidding. According to the experimental data at least experienced price leaders with lower marginal costs choose higher prices. In the bidding treatment, compensation payments to the price leader crowd in efficiency concerns.

Quantity-setting games with a dominant firm

We consider a possible game-theoretic foundation of Forchheimer’s model of dominant-firm price leadership based on quantity-setting games with one large firm and many small firms. If the large firm is the exogenously given first mover, we obtain Forchheimer’s model. We also investigate whether the large firm can emerge as a first mover of a timing game.

Stable cartels revisited

This paper analyzes cartel stability when firms are farsighted. It studies a price leadership model a la D’ Aspremont et al. (1983), where the dominant cartel acts as a leader by determining the market price, while the fringe behaves competitively. According to D’ Aspremont et al. ‘s (1983) approach a cartel is stable if no firm has an incentive to either enter or exit the cartel. In deciding whether to deviate or not, a firm compares its status quo with the outcome its unilateral deviation induces. However, the firm fails to examine whether the induced outcome will indeed become the new status quo that will determine its profits. Although the firm anticipates the price adjustment following its deviation, it ignores the possibility that more firms may exit (or enter) the cartel. In other words, the firm does not consider the fact that the outcome immediately induced by its deviation may not be stable itself. We propose a notion of cartel stability that allows firms to fully foresee the result of their deviation. Our solution concept is built in the spirit of von Neumann and Morgenstern’s (1944) stable set, while it modifies the dominance relation following Harsanyi’s (1974) criticism. We show that there always exists a unique, non-empty set of stable cartels.

On Forchheimer's model of dominant firm price leadership

We show that, in a simple price-setting game with one large firm and many small firms, the large firm does not accept the role of the price leader.

On Forchheimer's model of dominant firm price leadership

On Forchheimer's model of dominant firm price leadership

How Applicable is the Dominant Firm Model of Price Leadership?

In this paper, we examine the usefulness of the dominant firm model of price leadership to serve as a benchmark for organizing behavior in laboratory markets. This well established model, whose origins can be traced back over a hundred years, has been recently applied to such landmark antitrust cases as Standard Oil and Alcoa and more recently to the analysis of deregulated markets for electric power. Our results indicate that in posted offer markets the dominant firm quite often produces more than the model's benchmark and sometimes at much greater prices. With sealed offer auction rules and a low elasticity of fringe supply, the dominant firm produces the theoretical output at a price greater than the prediction. However, with a high elasticity of fringe supply, the dominant firm produces more output over a wide range of prices that includes the predicted price.

Cost of delay and endogenous price leadership

We study the effects of discounting in a standard endogenous price leadership model. We show that there will be occasional changes in the identity of the leader with any cost of delay or discounting, however small. By analyzing the incentives that induce a firm to take up the leader position, we derive positive predictions about which firm will lead most price changes. Firms with shorter reaction times will be more likely to become the price leader, as will firms with lower cost of delay if the firms' reaction times are similar.

Stable Cartels Revisited

This paper analyzes cartel stability when firms are farsighted. It studies a price leadership model a la D' Aspremont et al. (1983), where the dominant cartel acts as a leader by determining the market price, while the fringe behaves competitively. According to D'Aspremont et al.'s (1983) approach a cartel is stable if no firm has an incentive to either enter or exit the cartel. In deciding whether to deviate or not, a firm compares its status quo with the outcome its unilateral deviation induces. However, the firm fails to examine whether the induced outcome will indeed become the new status quo that will determine its profits. Although the firm anticipates the price adjustment following its deviation, it ignores the possibility that more firms may exit (or enter) the cartel that may eventually stabilize in a very different situation from the one the firm riginally induced. In other words, the firm does not consider the fact that the outcome immediately induced by its deviation may not be stable itself. We propose a notion of cartel stability that allows firms to fully foresee the result of their deviation. Our solution concept is built in the spirit of von Neumann and Morgenstern's (1944) stable set, while it modifies the dominance relation following Harsanyi's (1974) criticism. We show that there always exists a unique, non-empty set of stable cartels and provide an algorithm the determines it.

Equilibrium Contracts In a Bilateral Monopoly with Unequal Bargaining Powers

Real-world bilateral monopolies often indicate that one party exercises slightly Superior bargaining power than the other party. We analyze long-term, cooperative Contracts in bilateral monopolies with unequal bargaining powers. We assume that the Two parties bargain for a determinate price and quantity of the intermediate product by Optimizing a joint objective which takes into account the profits and bargaining power of Each party. We use a Bowley price leadership model to develop the multi-period Contracts and derive conditions that induce a Nash equilibrium at the jointly determined Points of operation. [C71,C78]

Credit Unions: Fringe Suppliers or Cournot Competitors?

Recent work has demonstrated the competitive relationship between credit unions and banks in consumer financial services. One issue underlying the nature of competition between the two, however, concerns the most appropriate way to model their interactions.Two possible approaches are the dominant-firm price-leadership model and the generalized Cournot model. In the former model, credit unions act as fringe suppliers who are price-takers in a homogeneous product market. In the latter, they possess (limited) market power. Oneway to distinguish the two is by examining the impact of credit union market shares on their pricing, as the two models imply differing effects. Our results are more consistent with the ``credit unions as fringe suppliers'' view. Using a pooled cross-section time seriesof 77 small local consumer lending markets throughout the U.S., each with 10 observations over 5 years, the focus is on a loan product ex ante thought to be sold in local markets, unsecured (non-credit card) loans. For this product, increasing credit union market sharesreduces credit union loan rates, consistent with a fringe supplier hypothesis.

Firms' Market Power, Endogenous Preferences and the Focus of Competition Policy

Conventional neoclassical views of dominance are generally restricted to a concern for a firm's market power seen in terms of the ability to raise and maintain prices above their marginal costs of production. A prime example of this approach is the application of dominant firm price leadership models, which has led to a restricted theoretical perception of the nature of market power and to an incomplete view of the social costs of monopoly power. This paper argues that a broader conception of a firm's market power leads to a quite different perspective on its conduct. In particular, if we allow dominance to involve the ability to influence product demand patterns, then the theoretical analysis of firm behaviour changes significantly. Specifically, it implies the endogeneity of preferences which, it is argued, represents an important alternative to mainstream analysis. It is suggested that we need to consider a firm's dominance not so much in terms of its pricing in the context of a particular market structure but to focus on its ability to gain advantage over its rivals in terms of 'creating' an asymmetry in the demand for its products. This has important implications for competition policy, for it suggests a need to concentrate on the 'power' of firms and less on the effects of a change in market structure. Likewise, we need to reconsider the adequacy of defining markets in terms of product demand characteristics.

Modeling OPEC behavior: theories of risk aversion for oil producer decisions

Theories of OPEC such as price leadership, cartel, or game theoretic models suggest an incentive for OPEC members to expand their production capacity well above current levels in order to maximize revenues. Yet individual OPEC members consistently explore for and develop oil fields at a level well below their potential. The cause of low oil exploration and development efforts among OPEC members, and even some non-OPEC members, may have to do with risk aversion. This paper describes an alternative theory for OPEC behavior based on risk aversion using a two piece non Neumann–Morgenstern utility function similar to Fishburn and Kochenberger (1979, Decision Science 10, 503–518), and Friedman and Savage (1948, Journal of political Economy 56). The model shows possible low oil production behavior.

Price leadership and asymmetric price rigidity

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.

Forecasting the frequency of changes in quoted foreign exchange prices with the autoregressive conditional duration model

This paper applies the Autorecressive Conditional Duration model to Foreign Exchange quotes arriving on Reuters screens. The Autoregressive Conditional Duration model, developed in Engle and Russell (1995) [Engle, R., Russell, J., 1995. Autoregressive conditional duration; a new model for irregularly spaced time series data, University of California, San Diego, unpublished manuscript.], is a new statistical model for the analysis of data that does not arrive in equal time intervals. When Dollar/Deutschmark data are examined, it is clear that many of the price quotes are simply noisy repeats of the previous quote. By systematically thinning the sample, a measure of the time between price changes is developed. These price durations are modeled with the ACD to obtain estimates of the instantaneous intensity of price changes. This measure is related to standard measures of volatility but is formulated in a way that incorporates the information in the irregular sampling intervals. A simple market microstructure model implies that the bid-ask spread should have predictive power for the volatility which is supported by the data. A model of price leadership however, is not supported.