What is Price Leadership?
The approach of pricing a product that is significantly lower than most of the competitors is known as Price Leadership. This is most common in an oligopolistic market, or a situation where there's very little competition. When there is strong competition with different value-driven offerings, each company can set pricing somewhat independently of the others.
Understanding Price Leadership
Price leadership is a method for setting loan rates that looks to leading banks in the industry to set the base loan rate. It is more likely to evolve inside of a sector when the number of businesses participating is limited, entrance into the market is restricted, goods are similar, demand is inelastic, or less flexible, and firms have fairly long average total costs.
Types of Price Leadership
Price leadership can be divided into three categories and they are -
Barometric model
It is adjustable in a short amount of time. When a company develops a new, more efficient, and cost-effective technique of production as a result of research or innovation, it begins to emulate this leadership strategy and lowers its pricing.
Because the company is too small to compete, other businesses start following the very same production plans and lowering prices to match with it. As a result, the firm's leadership is slightly shorter. The pricing is quickly taken over by large corporations.
Collusive
These are contracts reached by a small number of market leaders. Other small businesses are required to follow since they can't compete with the big firms. Price leadership occurs mostly as a result of lower operating expenses, but it is illegal if the public does not profit from the deal.
Dominant
It's an utter monopoly in a sense. It happens when a single company is big enough to control the market. The dominant enterprise sets the pricing, making it almost impossible for small businesses to compete by selling similar services or items.
There are moments when dominating enterprises reduce prices to the point that minor businesses can no longer compete and must shut down. The dominating corporation then raises prices at its decision. It's against the law. The government should constantly monitor whether the dominant corporation is crushing the competition.
Practical Example
In order to stay attractive to customers, a prominent electronic device company, A-one Device Limited, fixed the price of their wireless headphones at $100, and other electronic device makers with similar products and performance had to drop their price to $100 or lower. In addition, other companies reacted to the price leader, the 'A-one' electronic device manufacturer's actions and prices.
In Sentences
- Price leadership is a process in which a firm establishes a scenario in which it may influence the market price of goods or services.
- Large firms frequently employ price leadership as a tactic.