price leadership

2. DEFINITION
Price Leadership is an informal position of a firm in
most oligopolistic markets. It is an observation made of
oligopolistic business behavior in which one company,
usually the dominant competitor among several, leads
the way in determining prices, the others soon following
it
Thus price leadership is “situation in which a market
leader sets the price of a product or services and
competitors feel compelled to match that price”
The major objective is to avoid the uncertainty,
uncertainty in terms of getting the profit, uncertainty in
term of being in the market or sustain in the market.

3. Assumption
• Number of firms are small
• Entry to the industry is restricted
• Products are, by and large, homogeneous
• Demand for industry is inelastic or, very low elasticity
exists
• Firms have almost similar cost curves
• Technical reasons- Size, Efficiency(more efficient more
innovative) , Economies of Scale(cheap product better
leader), Firm’s Ability to forecast market conditions
accurately

5. Low Cost Price Leadership
• Occurs in case of a low cost firm which may or may
not have significant market power .
• The low-cost firm responds more quickly than its rivals
to changing costs and demand conditions from
experience .
• Through innovation in production methods, leading to
new techniques of production or better organization.
• The rival firms may follow suit or even decrease its
prices further, depending on their future assessments.

7. Dominant Price Leadership
One firm is recognized as the industry leader. Their
market share is much higher than sum of the market
share of all the other firms .
Dominant firm sets price with the realization that the
smaller firms will follow and charge the same price.
Effects : Rival Firms behave like firms in a perfectly
competitive market.
Occurs in case of a Dominant Firm which supplies a
major proportion of the total market.
A large firm is the dominant firm (high market share)
for the product can resort to price leadership, i.e., the
large firm fixes the price and other small firms act as
Price-takers.

9. Barometric Price Leadership
In Barometric price leadership, the most reliable firm
emerges as the best barometer of market conditions.
The firm could be the one with lowest cost of
production, leading other firms the follow the suit
The firm has better capability to forecast the
economic changes
The firm has a better knowledge of prevailing market
scenario.
The firm initiates well publicized changes in price.
Number of Large firms is more than the number of
Small firms.

10. Advantage
They can utilize the big firm’s costing department by
being price followers :
Small firms lack sufficient knowledge into the
principle of costing.
Leads to price stability avoiding price wars to an
extent.
Price will not be too high during boom periods and
not too low during recessions (as price leaders take a
long run point of view)

11. Conclusion
-All the Price Leadership models are controlled by a
strict MRTP Act
-MRTP Act : Monopoly Restricted Trade Practices Act
(India 1969) .
-The MRTP Act restricts the firms from misusing the
Price Leadership Model to engage in illegal practices.