Second-mover advantage and price leadership in Bertrand duopoly

Abstract

We consider the issue of first- versus second-mover advantage in differentiated-product Bertrand duopoly with general demand and asymmetric linear costs. We generalize existing results for all possible combinations where prices are either strategic substitutes and/or complements, dispensing with common extraneous and restrictive assumptions. We show that a firm with a sufficiently large cost lead over its rival has a first-mover advantage. For the linear version of the model, we invoke a natural endogenous timing scheme coupled with equilibrium selection according to risk dominance. The analysis yields, as the unique equilibrium outcome, sequential play with the low-cost firm as leader