Price Leadership.pptx

price leadership

1. DEFINITION Price Leadership is an informal position of a firm in most oligopolistic markets. It is an observation made of oligopolistic business behavior in which one company, usually the dominant competitor among several, leads the way in determining prices, the others soon following it Thus price leadership is “situation in which a market leader sets the price of a product or services and competitors feel compelled to match that price” The major objective is to avoid the uncertainty, uncertainty in terms of getting the profit, uncertainty in term of being in the market or sustain in the market.

2. Assumption Number of firms are small Entry to the industry is restricted Products are, by and large, homogeneous Demand for industry is inelastic or, very low elasticity exists Firms have almost similar cost curves Technical reasons- Size, Efficiency(more efficient more innovative) , Economies of Scale(cheap product better leader), Firm’s Ability to forecast market conditions accurately

3. Low Cost Price Leadership Occurs in case of a low cost firm which may or may not have significant market power . The low-cost firm responds more quickly than its rivals to changing costs and demand conditions from experience . Through innovation in production methods, leading to new techniques of production or better organization. The rival firms may follow suit or even decrease its prices further, depending on their future assessments .

4. Dominant Price Leadership One firm is recognized as the industry leader. Their market share is much higher than sum of the market share of all the other firms . Dominant firm sets price with the realization that the smaller firms will follow and charge the same price. Effects : Rival Firms behave like firms in a perfectly competitive market. Occurs in case of a Dominant Firm which supplies a major proportion of the total market. A large firm is the dominant firm (high market share) for the product can resort to price leadership, i.e., the large firm fixes the price and other small firms act as Price-takers .

5. Barometric Price Leadership In Barometric price leadership, the most reliable firm emerges as the best barometer of market conditions. The firm could be the one with lowest cost of production, leading other firms the follow the suit The firm has better capability to forecast the economic changes The firm has a better knowledge of prevailing market scenario. The firm initiates well publicized changes in price. Number of Large firms is more than the number of Small firms .

6. Advantage They can utilize the big firm’s costing department by being price followers : Small firms lack sufficient knowledge into the principle of costing . Leads to price stability avoiding price wars to an extent. Price will not be too high during boom periods and not too low during recessions (as price leaders take a long run point of view)

7. Conclusion All the Price Leadership models are controlled by a strict MRTP Act MRTP Act : Monopoly Restricted Trade Practices Act (India 1969) . The MRTP Act restricts the firms from misusing the Price Leadership Model to engage in illegal practices .