What is 'Price Leadership'?

Price leadership is when a leading firm in its sector determines the price of goods or services. This can
leave the leader's rivals with little choice but to follow its lead and match the prices if they are to hold
onto their market share. Alternatively, competitors may also choose to lower their prices in the hope of
gaining market share

Kinds:

Three kinds of Price Leadership are given below:

Types of Price leadership:

There are three kinds of price leadership.

(i) Dominant firm price leadership:

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.

Example:

SAIL vis-a-vis TISCO in Steel Sector.

(ii) Collusive Price leadership:

Collusive price leadership may emerge in oligopoly as a result of an explicit or a tacit collusion. The
leader may be the larger firm in the group and the small firms follow the price change initiated by the
dominant firm.

Example:

Price cartel through Manufacturers’ Association.

(iii) Barometric Price Leadership:

Barometric Price leadership gets its name from the fact that one firm acts as a “barometer”, reflecting
changing market condition or costs of production that require a change in price. A firm with small
market share but an efficient producer may act as a barometric leader and is in the best position to
judge the changes in demand and cost conditions and that its price change is in the best interest of the
group. Since the barometric leader has very little power to impose his decisions on other firms in the
industry, his leadership may thus be short lived.
Advantage of Price Leadership:

(i) One most important advantage of price leadership is that by this method the firms opt out

of the uncertainty surrounding pricing decisions in oligopoly. There is interdependence

between the firm’s own behaviour and the behaviour of its rivals. Firms choose a parallel

price rather than resort to undercutting each other. This process facilitates development of

new products and improvement in quality.

(ii) Price leadership eliminates the possibility of a price-war.

(iii) Price leadership involves an mutual understanding between the oligopoly firms and is the

most convenient strategy for oligopoly firms to stay and grow together

Disadvantages of Price Leadership

Often times, though, those who are market leaders are constantly lowering their prices, so the smaller
businesses have to do so as well. However, since they aren’t as big, in an attempt to remain within the
market, they may end up hurting themselves and then shutting down in the long run.

appleeeeeeeeeeeee

Apple waded into the smart phone market with iPhone starting at $599, but within two months it was
reduced by $100. The price reduction didn't last long either, as Apple quickly jumped into the subsidized
game.

The iPhone being subsidized put it on parallel pricing with its high-end competitors. The move marked
Apple's first foray into pricing a flagship product that was at least price neutral to their competition.
Samsung's Galaxy S3 hit the market at $249 through many carriers, and Verizon is currently offering the
Galaxy S4 for $249, with $50 mail-in rebate.

Earlier this month at Apple's world wide developers conference, Apple showcased a new MacBook Air
lineup, featuring amazing battery life, with a $100 price drop across the board. And while the MacBook
Air is at the high-end of PC pricing, as far as the ultrabook market is concerned Apple is now cheaper
than many of its competitors. Sony's new Vaio Pro 13 runs $1,249, while Samsung's Series 9 AO5 retails
for $1,299, with hardware specs that come in sub-par to the MacBook Airs.

CONCLUSION

V This chapter explains generic business-level strategies that executives select to keep their firms
competitive. Executives must select their firm’s source of competitive advantage by choosing to
compete based on low-cost versus more expensive features that differentiate their firm from
competitors. In addition, targeting either a narrow or broad market helps firms further understand their
customer base. Based on these choices, firms will follow cost leadership, differentiation, focused cost
leadership, or focused differentiation strategies. Another potentially viable business strategy, best cost,
exists when firms offer relatively low prices while still managing to differentiate their goods or services
on some important value-added aspects. All firms can fall victim to being “stuck in the middle” by not
offering unique features or competitive prices.

This paper analyzes duopolistic price-leadership games in which firms have capacity constraints. We
provide a complete characterization of price leader equilibria under quite general assumptions on
demand and for arbitrary capacities. We show that when capacities are in the range where the
simultaneous-move price-setting game (with efficiently rationed demand) yields a mixed-strategy
solution the large firm is indifferent between being a leader, a follower, or moving simultaneously. The
small firm, while indifferent between being a leader and moving simultaneously, strictly prefers to be a
follower. This motivates the discussion of games of timing with ex-post inflexible prices in which the
large firm becomes an endogenously determined price leader. We thus provide a game-theoretic model
of dominant-firm price leadership.