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-
The number of firms is small.
Entry of the new firms is restricted.
Products are by and large homogeneous.
The demand for industry is price inelastic or has very low elasticity.
Firms have almost similar cost curves.
Forms of price leadership models-
Low cost firm price leadership
Dominant firm price leadership
Barometric price leadership
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.
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