Identifying price-leadership structures in oligopoly

Abstract

Oligopoly can give rise to complex patterns of price interaction and adjustment. While oligopolistic firms may divide into price leaders and price followers, it is conceivable that some may take on dual roles, being a leader to one group but a follower to a different group in a hierarchical structure. The contribution of this article is to show how such dual relationships are possible in theory along with providing an empirical method to help identify price-leadership structures in n-firm oligopoly. As an illustration, we apply the method to British supermarkets and find a three-tier leader–follower structure.

Asymmetric input contracts under price leadership

“…We mainly referred to the UK grocery market, in which suppliers and sellers negotiate their input prices and where recent empirical evidence by Seaton and Waterson (2013) and Kim et al (2019) has shown that the downstream market competition has a price leadership structure.…”

“…In particular, Inderst and Valletti (2009) state: "Our own observations suggest, however, that at least in the UK grocery industry, linear pricing is prevalent in the cases of fresh produce, milk and bakery products." Moreover, in line with the empirical evidence provided by Kim et al (2019), we let the high capacity firm behave as the price leader and the low capacity firm behave as the price follower.…”

“…(A1) states that the large capacity firm is the price leader. This assumption mimics the behavior of industries like the UK grocery market, where a large capacity firm like Tesco has been shown to behave as a price leader over smaller retailers like Sainsbury and Morrison (Kim et al, 2019;Seaton & Waterson, 2013) . 7 (A2) ensures that in equilibrium p H 1 > p(k 1 + k 2 ) is satisfied.…”

“…Consequently, empirical studies of price leadership have been conducted, among others, in the cigarettes, steel, automobiles, ready-to-eat cereals, turbogenerators, gasoline, newsprint, and cheese industries (see Marshall et al, 2008). 1 Recent empirical evidence brought by Seaton and Waterson (2013) and Kim et al (2019) shows that the UK grocery market behaves according to a price leadership type of competition. In particular, Kim et al (2019) generalize the approach by Seaton and Waterson (2013), which identifies a price leadership structure in duopolistic markets, to a larger number of firms and to a multi-level price leadership structure.…”

“…1 Recent empirical evidence brought by Seaton and Waterson (2013) and Kim et al (2019) shows that the UK grocery market behaves according to a price leadership type of competition. In particular, Kim et al (2019) generalize the approach by Seaton and Waterson (2013), which identifies a price leadership structure in duopolistic markets, to a larger number of firms and to a multi-level price leadership structure. They find that the firms with the largest market shares (Tesco and Asda) behave as market leaders, and the smaller rivals follow in a subsequent two-tier structure.…”