Nick Vriend and seminar audiences at UPF, Munich, Stockholm for helpful comments. Cabrales and Nagel

We consider a linear price setting duopoly game with differentiated products and determine endogenously which of the players will lead and which one will follow. While the follower role is most attractive for each firm, we show that waiting is more risky for the low cost firm so that, consequently, risk dominance considerations, as in Harsanyi and Selten (1988), allow the conclusion that only the high cost firm will choose to wait. Hence, the low cost firm will emerge as the endogenous price leader.

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 the cases where prices are either strategic substitutes and/or complements, dispensing with common extraneous assumptions. We show that a firm with a sufficiently 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 riskdominance. This yields sequential play with the low-cost firm as leader as the unique equilibrium outcome.

The understanding of coordination games has increased greatly over the last thirty years through advances in game theory and tests in experimental economics laboratories. A given utterance, of necessity, is a puzzle and creates a coordination game of meaning. The solution principles used in this game should be consistent with those found in all coordination games, and can explain certain elements of pragmatics: in particular, when a speaker can successfully employ irony, metaphor, humor, hints, indirectness, and implication.