Competitive pricing by a price leader

The authors examine the problem of pricing in a market where one brand acts as a price leader. They develop a procedure to estimate a leader’s price rule, which is optimal given a sales target objective, and allows for the inclusion of demand forecasts. The authors illustrate the present estimation procedure by calibrating this optimal price rule for both the leader and the follower using data on past sales and prices from the mid-size sedan segment of the U.S. automobile market. The results suggest that a leader-follower system (Stackleberg) seems more consistent with the pricing behavior in this market, than a mutually independent pricing rule (Nash). The authors also find that the present optimal price rule explains this market data better than other pricing schemes that do not account for optimizing behavior on the part of the leader and the follower.