The dominant firm is to set the price.

It will follow the

general principle of profit maximisation i.e. MC = MR. The
dominant firm maximises its profits at output level OQ because it
is at this output that MC d is equal MRd. Thus, dominant firm sets
the price OP2. At OP2 price, the total market demand is OQ of
which the dominant firm supplies OQd and the rest OdQ is
supplied by the small firms. It may be noted that the dominant firm
maximises its profit by equating its marginal cost to its marginal
revenue. The smaller firms being price-takers, may or may not
maximise their profit. It all depends on their cost structure. But one
thing is definite. It the dominant firm wishes to maximise its profits,
it must make sure that the small firms will not only follow its price,
but will also produce the right amount of output. Unless there is a
tight market sharing agreement the small firms may produce less
than OQs and thus force the dominant firm to a position where
profits are not the maximum.

There can be many variations of the dominant firm model.

For instances if there are two or more dominant firms in an
industry, the small firms may look to one or all of the large firms
for price leadership. Product differentiation may further complicate
the situation.

2.2.3. Barometric Price-Leadership:

In this model, that firm is chosen as leader which is

supposed a have a better knowledge of market conditions as well
as a better ability to forecast future market developments. All other
firms agree, formally or informally, to follow its price changes. In
other words, the firm chosen as leader is regarded as a barometer
reflecting the changes in economic conditions. The barometric firm
may neither be a low cost nor a very large firm. Generally, it is a
firm which, on the basis of its past performance, has established
the reputation of a good forecaster of economic changes. A firm
belonging to pother industry may be chosen as the barometric
leader. For example, a firm in the steel industry may be accepted
as barometric leader for price changes in the motor car industry.

There are various reasons for establishing barometric price

leadership.

Firstly, rivalry among several large firms in an industry may

make it impossible to accept any one of them as leader.

Secondly, followers do not have to continuously recalculate

costs as economic condition change. They simply follow the
barometric leader.