Self-Enforcing Price Leadership

A dynamic Bertrand-duopoly model where price leadership emerges in equilibrium is developed. In the equilibrium, a firm leads changes and its competitor always matches next period. The firms produce homogeneous product are identical except for information they possess about demand. market size follows two-state Markov process. Market realizations observed by one of but not other. Without explicit communication, allows to jointly approximate monopolistic profits as becomes more persistent provided that patient. presence dynamics, informed firm’s serves signal current therefore future conditions. proposed could cut prices without being detected, it does do so because would lead uninformed also lower their following