What are the Characteristics, Advantages and Limitations of Price Leadership in Economics?
Here Information provides help to understand about the Characteristics, Advantages and Limitations of Price Leadership in detail.
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What are the Characteristics, Advantages and Limitations of price Leadership?
Main Characteristics of Price Leadership:
The main characteristics of price leadership are as follows-
- Normally a price leader firm makes few but large and dramatic prince changes. Frequent price changes by the leader firm tend to undermine the loyalty of the followers and indicates vacillating altitude on the part of 'the Price Leader'.
- The price leader usually leads only in price rise; in case of price reduction it becomes a follower.
- The price leader would change the price only when changes in demand and cost conditions are of a permanent nature.
- The price leader must be ready to bear the risks of price-war in order to establish and maintain his leadership.
- Usually the price leadership takes a long run view, that is, he is willing to forego short terms gains for long term gains.
The main advantages of price leadership may be summarised as follows-
- Price leadership is beneficial to small firms in their price fixation policy.
- By avoiding price-wars, the price leader ensures price stability.
- Price leadership also helps in reducing the intensity of cyclical fluctuations.
- The price leader possesses expertise, skill, knowledge and competency in forecasting demand and in pricing judgments and as such other firms feel quite safe in following its lead.
- As price leadership avoids price-wars, there is an implicit idea of co-existence of live and let live in price leadership.
The following are the main limitations of price leadership-
- The success of price leadership of a firm depends on the accuracy of its estimates about reactions of its rival firms, as also on the accuracy of the knowledge of the demand and supply conditions in the market.
- If the price leader has fixed an unduly high price than what the followers would prefer, the rival firms may indulge in hidden price cuts in order to increase their sales. Such secret price cutting devices are, for e.g., offer of rebates and discount, favourable credit facilities, 'money back' guarantees, after delivery free services, easy installments with low interest rate, etc. Price leadership would not be successful or effective in such cases.
- Another limitation of maintaining price leadership is the tendency on the part of rival firms to indulge in non-price competition to increase their sales even though they charge the price set by the price leader. Such non-price competition may take the form of advertising and other methods of sales promotion, improvement in the quality of production, etc. as a result of such devices, the price leader too has to follow suit and thus it may not be able to maintain its leadership for a long time.
- Price leadership will not continue for a long time if the price leader is producing at a higher cost and hence fixes a higher price. In such case, the rival firms would make secret price cuts and thus adversely affect the sales of the price leader. High price fixed by price leader may also attract new competitors into the industry and these new entrants may not accept his leadership.
- Lastly, the differences in cost of production of different firms also pose a problem. If the price leader is producing at a high cost and thereby fixes a high price and the rival firms have low cost of production, they will easily undercut the price. On the other hand, if the price leader has a lower cost, he will set a low price which may not suit his rivals and he will then have to face their antagonism and induce them to break his leadership.
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Tech writer at NewsandStory