Barometric price leadership

Barometric price leadership refers to situations in which a price leader acts as a barometer of prevailing market conditions for other firms in the industry. In this paper, a model of price setting with costly information acquisition is analyzed. It is shown that the unique equilibrium outcome is for one firm to acquire information and become a price leader, while the other firm does not purchase information and becomes a follower. In contrast to most previous work, leadership in this model is due to the informational setting, not the price-setting mechanism as, with symmetric information, the unique outcome is the symmetric Bertrand equilibrium.