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 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. JEL Classifications: L11, C92