Meaning and types of price leadership under oligopoly.
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Meaning and Type of Price Leadership under Oligopoly.
Meaning of Price Leadership (Pioneer Pricing):
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:
- Low cost price leadership and
- Dominant firm price leadership and
- Barometric price leadership
- Low Cost Price Leadership:
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:
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:
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.
Meaning of Price Leadership
Low Cost Price Leadership
Dominant Firm Price Leadership
Barometric Price Leadership
Price Leadership- Meaning and Types.
Tech writer at NewsandStory