Price Leadership
Candlefocus EditorPrice leadership is a market strategy whereby a dominant supplier in a given industry controls the prices of goods or services and set the standards of the entire industry. When a company has price leaderhip, it becomes the ‘price setter’ in the industry, and its decisions and actions affect the pricing behaviour of the competitors.
The three primary models of price leadership are barometric, collusive, and dominant. Barometric price leadership is when companies take cues on the actions of their competitors, with decisions made following the lead of the most efficient market leader. Among the strategies considered here, it is the least aggressive.
Next is collusive price leadership, when companies in the industry cooperate to create an agreement regarding the price of their goods or services. This type of agreement is likely to occur between large corporations. Companies will collude in an attempt to gain the most economic advantage and limited the effectiveness of rivalry between firms in the industry.
Finally, dominant price leadership is the most aggressive practive, whereby a lead firm uses its power to create an oligopoly, controlling a large share of the market and pricing at levels that exclude competitors. Dominant firms usually possess a great combination of size, knowledge, and capital.
Economists generally agree that certain conditions can create a favourable environment in which price leadership is likely to emerge. The following conditions are most often listed:
- A small number of companies in the industry
- Entry to the industry is restricted
-Products are homogeneous
-Demand is inelastic
Price leadership can be an effective strategy for firms to gain an advantage in the market plae. It strengthens the lead firm's position within the industry and gives them a greater degree of control. It also eliminates unnecessary competition and increases margins for those in the industry. However, it can also lead to possible anti-trust regulation if used excessively or in an anti-competitive way. Businesses should be aware of the danger of such practices and be aware of any restrictions or regulations in their country that may limit or control such strategies.