Types of Price Leadership
There are 3 types of price leadership models that market leaders usually fall into: barometric price leadership, dominant firms, and collusive price setting.
Barometric price leaders
Barometric price leaders have a good pulse on market conditions and are able to adapt their prices to meet consumer demand, usually indicating to competitors to adjust their price level accordingly based on trends.
Dominant firms are just that, they dominate the market based on a competitive advantage that is typically driven by resources and innovation.
Collusive price setting is a grey area and can be considered illegal due to either explicit or implicit collusion between oligopolistic players in a market. This is because companies that collude raise the barrier to entry for smaller firms and can artificially control the supply and demand of a product based on profitability goals.
Price Leader ExamplesCommon industries that have price leaders are:
Deeper Insights on Price Leadership
Price leaders are usually the first ones in their industry to implement price changes that drive the average price higher. Price leaders are able to do this as they win through innovation and brand recognition with consumers.The price leader tends to have more capital and resources, enabling them to sustain lower prices than other sellers. If their brand clout is strong enough, they may even be able to sustain a higher price than competitors. No matter the strategy, competitive edge could be lost if they are not followed by the rest o the market.
Price leadership can be advantageous to an industry by pooling resources to enable innovation and economies of scale. This can often translate to higher prices for consumers and barriers to entry for new competition.
On the flip side, price leaders can lead to collusion, which commonly happens in industries where the barrier to entry is so high that there is no competition, enabling natural monopolies or oligopolies. Collusion is illegal as it encourages predatory pricing and unfair practices. Governments usually establish regulatory bodies for industries which are predisposed to having a dominant firm in one market, subsidizing competition to discourage illegal practices and corruption.