Price leadership-Price leadership may emerge spontaneously due to technical reasons or out of tacit or explicit agreement between the firms to assign a leadership role to one of them.
economics
Description
Price
Leadership Model
Price leadership-Price
leadership may emerge spontaneously due to technical reasons or out of tacit or
explicit agreement between the firms to assign a leadership role to one of
them. The spontaneous price leadership may be the result of such technical
reasons as size, efficiency, economies of scale or firm’s ability to predict
market conditions accurately or a combination of these factors
The price leadership is found under
both product homogeneity and product differentiation. There may be, however,
price differentials commensurate with product differentiation. Price
differentials may also exist on account of cost differentials.
One of the important aspects of
price leadership is that it often serves as a means to price discipline and
price stabilization. Achievement of this objective establishes an “effective price leadership”.
Conditions for effective price
leadership-
1.
The number of firms is small.
2.
Entry of the new firms is
restricted.
3.
Products are by and large
homogeneous.
4.
The demand for industry is price
inelastic or has very low elasticity.
5.
Firms have almost similar cost
curves.
Forms of price leadership models-
1.
Low cost firm price leadership
2.
Dominant firm price leadership
3.
Barometric price leadership
1. Low cost firm price leadership-
This type of price leadership occurs when a low cost firm which may or may not
have significant market power. In this the firm responds more quickly than its
rivals to changing costs and demand conditions. In such conditions market
leader will follow the low cost firm. The market leader may decrease its price
further depending on their future assessments.
