Price Leadership

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Definition of 'Price Leadership'

Price leadership is a pricing strategy in which one dominant firm in an oligopoly sets the price for a product or service, and the other firms in the industry follow suit. This can be an effective strategy for the dominant firm because it can set a price that maximizes its profits, while the other firms are unable to undercut the dominant firm's price without losing market share.

There are several factors that can contribute to a firm's ability to exercise price leadership. These include:

* The firm's market share: The larger the firm's market share, the more likely it is to be able to set the price for a product or service. This is because a large firm can afford to lose some market share without significantly impacting its profits.
* The firm's brand image: A firm with a strong brand image can also be more likely to exercise price leadership. This is because consumers are more likely to be loyal to a brand that they trust, and they are less likely to switch to a competitor's product or service if the price is higher.
* The firm's access to inputs: A firm that has a strong bargaining position with its suppliers can also be more likely to exercise price leadership. This is because the firm can threaten to take its business elsewhere if its suppliers do not give it the terms that it wants.

Price leadership can be a very effective strategy for firms that are able to achieve it. However, it is important to note that this strategy can also be risky. If the dominant firm sets a price that is too high, it can lose market share to its competitors. Additionally, if the dominant firm's costs increase, it may be forced to lower its prices, which could lead to a decrease in its profits.

Overall, price leadership is a complex strategy that can be both effective and risky. Firms that are considering this strategy should carefully evaluate their market position and their ability to execute the strategy before making a decision.

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