Price Leadership

Price Leadership

Price Leadership, a situation in which the price of a product is set by a major firm in an industry and followed by the others in it. Price leadership is most likely in oligopoly, when the number of firms is few, and characteristically when the product is more or less homogeneous. A good example is steel; the United State Steel Corporation is often cited as a typical case. It has the largest capacity in a well-defined industry; it sets the price and the small number of other firms in the industry follow it. As a solution of the oligopoly problem price leadership has the -virtue of removing the uncertainty about the reactions of rivals. Everybody knows what the price is and when to change; the behaviour of the price leader gives the signal.

The biggest firm need not be the price leader. Suppose that the firms have similar but not identical shares of the market but that the smaller firms have reduced price and the bigger ones have followed them. The larger units might wish to raise price because at the lower price they are not maximizing profits, but since the smaller units fear that disproportionate affect on them of falling total sales if prices are raised, they will not increase price and cannot be made to do so. The firms with the smaller shares of the market thus set the price. This cannot happen where market shares are unequal and there is a dominant firm.


ExamplesEconomic - Neoclassical Economics

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