Your Email

Pasword

Price leadership is a situation in which all firms follow the lead of a big firm. There is a tacit agreement among the firms to sell the product at a price set by the leading firm of the industry.

If products are homogenous, a uniform price is established.

If the products are differentiated then also prices can be uniform. The leader announces changes in price from time to time and other firms have to follow him.

There are three models of Price leadership. They are:

1. Low cost price leadership and
2. Dominant firm price leadership and
3. Barometric price leadership

• Low Cost Price Leadership:

In this model of oligopoly pricing, the firm having lower costs than other firms sets a price which other firms accept and charge, though they do not maximise their profits at that price.

Suppose there are two firms A and B. They produce identical product. A is more efficient than B. Therefore, A produces at lower costs. A and B may or may not agree to share market equally.

For firm A profit maximising output would be where its Marginal cost (MC) is equal to its Marginal revenue (MR). This will give it the equilibrium price also. Firm B will accept this price, though this will not maximise its profit.

• Dominant Firm Price Leadership:

In this model, the dominant firm sets the price which is profit maximising price for it. It allows the small firms to sell all they wish at that price. The small firms are merely price takers and sell that quantity for which their marginal cost equals the price. It is assumed that the market demand is known to the dominant firm

The dominant firm's output is often as large as all firms together produce. The dominant firm is in a position to eliminate its small rivals and establish its monopoly, but it may create legal problems.

• Barometric Price Leadership:

In this model, here all firms agree to follow the price changes made by a firm which has a good knowledge of the market conditions and thus it can forecast future market trends better than other firms.

Thus, the firm chosen as a leader is a kind of barometer which reflects the changes in the market. It is not necessarily, a low cost or dominant firm.

It has established its reputation as a good forecaster and hence it is acceptable as a leader in the market. The followers are not require to make continuous cost and demand calculations. They can benefit by following the price policy of barometric firm.

© www.newsandstory.com