Price Leadership

Price leadership is a pricing strategy followed in many oligopolistic industries. One firm normally
announces new price changes. Either by an explicit or an implicit agreement, other firms in the industry
regularly follows the pricing moves of the industry leader.

• Effective price leadership can only happen if price movements initiated by the leader
have a high probability of being adopted and no maverick or nonconforming firms exist.
• The fewer the number of firms in the industry the more effective price leadership is
likely to be.
• Two major price leadership patters have been observed in various industries from time
to time: Barometric and Dominant Price Leadership.

Barometric Price Leadership

In barometric price leadership, one firm announces a change in price that it hopes will be accepted by
others. The leader need not be the largest firm in the industry. In fact, this leader may actually change
from time to time. The leader must, however, be reasonably correct in its interpretation of changing
demand and cost conditions so that suggested price changes will be adopted in the industry-wide. In
essence, the barometric price leader merely initiates a reaction to changing market conditions that
other firms find in their best interest to follow. These conditions might include such things as cost
increases (or decreases) and sluggish (or brick) sales accompanied by inventory buildups (or shortages)
in the industry.

 Barometric price leadership takes place due to the following reasons:

a. Lack of capacity and desire of organizations to estimate appropriate supply and demand conditions.
This influences organizations to follow price changes made by the barometric organization, which has a
proven ability to make correct forecasts.

b. Rivalry among the organizations may make a leader, which can be unacceptable by other
organizations. Thus, most of the organizations prefer barometric price leadership.

Dominant Firm Price Leadership

In dominant firm price leadership, one firm establishes itself as the leader because of its larger size,
customer loyalty, or lower cost structure in relation to other competing firms. The leader may then act
as a monopolist in its segment of the market. What is the incentive for followers to accept the
established price? In some cases it may be a fear of cutthroat retaliation from a low-cost dominant firm
that keeps smaller firms from undercutting the prevailing price. In other cases, following a price leader
may be viewed as simply a convenience.
Dominant Price Leadership:

Refers to a type of leadership in which only one organization dominates the entire industry. Under
dominant price leadership, other organizations in the industry cannot influence prices. The dominant
organization uses its power of monopoly to maximize its profits and other organizations have to adjust
their output with the set price.

The interests of other organizations are ignored by the dominant organization. Therefore, dominant
price leadership is sometimes termed-as partial monopoly. Price leadership by the leading organization
is most commonly seen in the industry.

Barometric Price Leadership:

Refers to a leadership in which one organization declares the change in prices at first and assumes that
other organizations would accept it. The organization does not dominate others and need not to be the
leader in the industry. Such type of organization is known as barometer.

This barometric organization only initiates a reaction to changing market situation, which other
organizations may follow it if they find the decision in their interest. On the contrary, the leading
organization has to be accurate while forecasting demand and cost conditions, so that the suggested
price is accepted by other organizations.

Barometric price leadership takes place due to the following reasons:

a. Lack of capacity and desire of organizations to estimate appropriate supply and demand conditions.
This influences organizations to follow price changes made by the barometric organization, which has a
proven ability to make correct forecasts.

b. Rivalry among the organizations may make a leader, which can be unacceptable by other
organizations. Thus, most of the organizations prefer barometric price leadership.