Download Economics - Price Leadership - Notes - Economics and more Study notes Economics in PDF only on Docsity! Types of Price Leadership There main types of price leadership are:- (i) Price Leadership of a Dominant Firm. Under this type of price leadership, there is generally one firm which produces the bulk of the product of the industry. By virtue of this position, it is able to dominate the entire market. It sets the price and the other firms simply accept this price. The other firms are not in a position to exercise any influence on the market price. So, the dominant firm fixes a price so as to maximize its profits. The other firms have to adjust their output to the price so fixed by the dominant firm. (ii) Barometric Price Leadership. Under this type of price leadership, an old, experienced and the largest firm assumes the role of a leader. Besides, it protects the interests of all firms instead of merely promoting its own interest. In a way it acts as the custodian of firms operating in the industry. It fixes a price which is found to be suitable for all the firms in the industry. This price is fixed by taking into consideration the market conditions with regard to the demand for the product, cost of production, competition from the rival producers, etc. (iii) Exploitative or Aggressive Price Leadership. Under this category, one big firm comes to establish its supremacy in the market by following aggressive price policies. This firm compels other firms to follow it and accept the price fixed by it. In case the other firms show any independence, this firm threatens them and coerces them to follow its leadership with the result that the prices set by this firm comes to be accepted. Price-output Determination under Price Leadership Economists have developed various models concerning price-output determination under price leadership on the basis of certain assumptions regarding the behavior of the price leader and his followers. We take simple case here to show price-output determination under price leadership on the following assumption:- (a) There are only two firms X and Y and firm X has a lower cost of production than Y, (b) the product of the firms is homogeneous or identical so that the consumers are indifferent as between the firms, (c) both X and Y have equal share in the market, and they are facing the same demand curve which will be half of the total market demand curve. Y L 0 N M QUANTITY X Fig. 10 Price-output Equilibrium Under Price Leadership In figure.10, DD is the demand curve facing each firm which is half of the total demand curve for the product, MR is the marginal cost curve of firm X and MCY is the marginal cost curve of the firm Y. Since we have assumed that MCb D K P MCa F D E MR P R IC E & C O S T
