PRICE LEADERSHIP

R I T I K A R A J G O PA L J O B I N M AT H E W S SURAJ KARRA A D I T YA K E R K A R

S H I VA N A N D K O T I A N

OBJECTIVES :
By the end of this presentation we should be able to learn :

1. 2.

What is the Price Leadership Model? Why has the Price Leadership Model evolved?

3.
4. 5.

Conditions for effective Price Leadership Model?

What are different forms of Price Leadership Model? How does Price Leadership Model work in these forms?

WHAT IS THE PRICE LEADERSHIP MODEL?

Definition :
Price Leadership is an informal position of a firm in most oligopolistic markets. It is an observation made of oligopolistic business behavior in which one company, usually the dominant competitor among several, leads the way in determining prices, the others soon following.

WHY HAS THE PRICE LEADERSHIP MODEL EVOLVED?

Technical reasons

Size, Efficiency, Economies of Scale, Firms Ability to forecast market conditions accurately
Tacit agreement between the firms

CONDITIONS FOR EFFECTIVE PRICE LEADERSHIP MODEL

Number of firms are small.

Entry to the industry is restricted.

Products are, by and large, homogeneous. Demand for industry is inelastic or, very low elasticity exists.

Firms have almost similar cost curves.

FORMS OF PRICE LEADERSHIP MODELS

Low Cost Price Leadership

Dominant Price Leadership

Barometric Price Leadership

LOW COST PRICE LEADERSHIP

Occurs in case of a low cost firm which may or may not have significant market power. The low-cost firm responds more quickly than its rivals to changing costs and demand conditions. In such conditions, the rival firms follow suit. The rival firms may even decrease its prices further, depending on their future assessments.

LOW COST PRICE LEADERSHIP (CONTD)

AC1, MC1 Cost curves for low cost firm (largest firm) AC2, MC2 Cost curves for all the rival firms. OP2= Unit cost for low cost firm OQ2= Selling quantity at price OP2

OP3= Unit cost for rival firms OQ1= Selling quantity at price OP3

LOW COST PRICE LEADERSHIP (CONTD)

Example Nirma Surf

vs

DOMINANT PRICE LEADERSHIP

Occurs in case of a Dominant Firm which supplies a major proportion of the total market.

Behavior :

Price Cutting Profit Maximization

Effects : Rival Firms behave like firms in a perfectly competitive market

DOMINANT PRICE LEADERSHIP (CONTD)

(a) : Market Demand-Supply curve of Small firm D Dm = Market demand Curve P1SS = Supply Curve of Small Firms

(b) : Market Demand curve of Dominant firm P3DD = Demand Curve of Dominant Firm P3 MPD = MR of Dominant Firm

DOMINANT PRICE LEADERSHIP (CONTD)

Example:

State Bank of India has always been the dominant firm in the Indian market. SBI fixes the interest rate and the other banks soon follow the pricing.

BAROMETRIC PRICE LEADERSHIP

Number of Large firms is more than the number of Small firms. A firm has a better knowledge of prevailing market scenario. The firm has better capability to predict the future. The firm initiates well publicized changes in price. The rival firms accept the change in price in order to retain its market share.

BAROMETRIC PRICE LEADERSHIP (CONTD)

Example : In 2002 Coca Cola introduced the 200 ml bottle for Rs 5.

Pepsi followed in just 5 days to keep their market share

Summing up

All the Price Leadership models are controlled by strict Anti Monopoly laws enforced by the Government. These strict measures restrict the numerous companies from illegal trade practices.

Thank You