Price Leadership Strategies

Table of contents

What Is Leadership Price?

Leadership price is a principle which occurs when a company often known as a price leader have such a degree of market control that it cna determine the price for goods and services within the entire market. It often happens when a business has the greatest market share in its possession. It is crucial to say that price leadership occurs in situations when oligopolies exist. For instance, one of the well-known markets with price leaders is the airline industry.

When there is a price leader in the market, there is no other choice for competitors but to follow one’s lead. Such a phenomenon pushes rivals toward setting teh same prices as a price leader, especially if firms want to hold to their existing market share. Returning to the example of the airline industry, price leadership takes place in the form of a dominant company setting the tone and prices for the services and other firms following the lead.

It is crucial to know that price leadership occurs within the scope of particular economic conditions. These prerequisites ensure price leaders get their domination within the market. When it comes to such conditions, it is crucial to mention the following:

• A small number of businesses involved in the market.
• There are restricted conditions for new entrants.
• The product within the market are homogeneous.
• The demand curve is inelastic.
• All the companies wihtin the scope have a similar long-run average total cost or LRATC.

When such economic preconditions exist, there is a massive chance for price leadership to occur. The key thing is to ensure that price leadership does not transform into a monopoly. That is why governments impose rules and regulations that create preconditions for a fair business competition.

Types of Price Leadership

Speaking about the types of leadership price, there are three kinds - barometric, collusive, and dominant. Each types has specific characteristics and is determined by certain preconditions.

• Barometric. This type of price leadership occurs in the conditions when a particular company is more aware and adept of identifying and monitoring shifts in market forces. For instance, it can track down the prodction cost, which allows responding to market forces more efficiently than others. Equipped with such knowledge, a barometric price leadership can lead to a business initiating price change and competitors can only follow. Even a company with a small market share can become a barometric price leader. It happens if a firm more attuned to the market and can answer to its calls more efficiently than others. Yet, one should understand that barometric price leaders does not have enough power to set price for a long time, namely because of the lack of resources.
• Collusive. The type of price leadership takes place within the market having oligopolistic preconditions. It occurs when there is an agreement among a few domiantn firms. Often, such agreements leads to the fact of keeping prices at the level agreed upon. The collusive price leadership often exists in industries with a high cost of entury. Besides, it is crucial for the cost of production is to be known and available to everyone involved. It is crucial to add that agreements between companies to set particular pricing strategies is illegal. It is deemed so if comapnies elimiante competition through predatory means. As a result, there is a fine line between collusive price leadership and illegal collusion. One of the key aspects distingishing between the approaches depends on changes within the operation costs of companies involved.
• Dominant. The type of price leadership happens when a business control almost an entire market share within the industry. In a dominant price leadership, smaller business often provide the same products and services as the dominant firm. However, these smaller companies does not have the power to impact prices within the market. Often, dominant price leadership borders with partial monopoly. Dominant companies can use predatory pricing to forcefully eliminate the competition. In most nations, dominant price leadership is illegal and is bounded by antitrust and antimonopoly rules and regulations.

These types of price leadership explore the phenomenon and show what are crucial differences between the aforementioned kinds. It all depends on the environment and conditions in which price leaders exist.

Advantages of Leadership Price

There is a number of important advantages of price leadership. Some markets and companies can benefit from price leaders. At this point, the advantages of price leadership is the following:

• Profits. Price leadership occurs when a company sets a higher price for a product that other companies need to follow. Apparently, with a higher price dominating in the market, all the companies existing there will profit from high prices. In such a case, to get an advantage, it is necessary for consumer demand to remain stable. Besides, in the conditions of price leadership competitors follow high price and ensure the price leader won’t lose one’s market share.
• Avoiding price wars. In the market with the equal number of companies of smaller size, price wars can occur. In such a case, when some company goes further and establishes itself as a price leader, there is high probability that price wars will reduce. A dominant company will lead the way and set prices, which means competitors merely need to follow the path of a leader.
• Better quality products. Price leaders often increase their annual revenues. In a proper degree of price leadership, companies with additional revenues can reinvest the finances into improving quality of products. For products with higher quality customers are willing to pay premium prices, which systains the strategies imposed by price leaders. In addition, revenues from higher prices can be used for research and development, which means growing innovation and more innovative products.

These advantages of price leadership can be achieved if price leaders engage in reasonable leadership strategies.

Conclusion

Leadership price occurs when a comapny gets the most market share by the means of having unique knowledge on market forces. There are three key types of prices leadership, which includes barometric, collusive, and dominant. Besides, price leadership can bring a range of advantages, including higher profits, reduced price wars, and better quality of products. However, one should be aware that price leadership can lead to monopoly, which is illegal.

Tags:

• price leader

• market share

• leadership price

Marina Dias,

Pricing Solution Consultant at Competera