Working Paper: CEPR ID: DP9818
Authors: Luis M. B. Cabral
Abstract: I examine the dynamics of oligopolies when firms derive subjective value from being the market leader. In equilibrium, prices alternate in tandem between high levels and occasional price wars, which take place when market shares are similar and market leadership is at stake. The stationary distribution of market shares is typically multi-modal, that is, much of the time there is a stable market leader. Even though shareholders do not value market leadership per se, a corporate culture that values market leadership may increase shareholder value. From a competition policy point of view, the paper implies that price regime change dynamics and parallel pricing are consistent with competitive behavior -- in fact, hyper-competitive behavior.
Keywords: Behavioral IO; Dynamic Oligopoly; Market Shares; Ordinal Rankings; Price Wars
JEL Codes: L13; L21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market share proximity (L17) | price wars (L11) |
| corporate culture valuing market leadership (M14) | shareholder value (G34) |
| price wars (L11) | bimodal distribution of market shares (C46) |
| market shares (L17) | correlated price changes (E30) |