Pricing Patterns as Outcomes of Product Positions

Journal of Business, January 1999

Rajeev K. Tyagi

Abstract

Prior empirical work shows that different markets are characterized by different pricing patterns, such as Bertrand-Nash pricing or Stackelberg leader-follower pricing. This paper considers a duopolistic market where ex ante identical firms sequentially position their products prior to competing on prices (in a single- or multi-period setting), and shows that the unique equilibrium outcome involves: (i) firms choosing Stackelberg pricing over Bertrand-Nash pricing, and (ii) the positioning first mover acting as the price leader. An attractive property of this model is that the ex post larger firm acts as the price leader, which is consistent with prior empirical evidence.