Group 6

Richa Prasad
Sunita Kaur
Souvik Kayal
Sandipan Nag
M S Pratap Reddy
 Definition
 Conditions for effective Price
Leadership Model
 Forms of Price Leadership Model
 Advantages
 Conclusion
Price Leadership is-

“Situation in which a market

leader sets the price of a
product or services
and competitors feel compelled
to match that price”
• Technical reasons
Size, Efficiency(more efficient more innovative) ,
Economies of Scale(cheap product better
leader), Firm’s Ability to forecast market
conditions accurately
Number of firms are small.
Entry to the industry is restricted.
Products are basically , homogeneous.
Demand for industry is inelastic or, very low
elasticity exists.
Firms have almost similar cost curves.
• Low Cost Price Leadership

• Dominant Price Leadership

• Barometric 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 from experience.
• Through innovation in production methods,
leading to new techniques of production or
better organization.
• The rival firms may follow suit or even
decrease its prices further, depending on their
future assessments.
 Unit A MC1
P3
Cost B AC1
and P2 MC2
Revenue AC2
C
AR
P1
MR

O
Q1 Q2 Output per time unit
x
• One firm is recognized as the industry leader.
Their market share is much higher than sum of
the market share of all the other firms

• Dominant firm sets price with the realization that

the smaller firms will follow and charge the same
price

• Effects : Rival Firms behave like firms in a

perfectly competitive market
 y y
D S
PRICE

PRICE
&
COST
P3 E
MC
P2 A B
P3
P
’P2
’
P P1’
1 DD DD
x x
o o
OUTPUT Q MR OUTPUT
• In Barometric price leadership, the most reliable firm emerges
as the best barometer of market conditions. The firm could be
the one with lowest cost of production, leading other firms the
follow the suit.
The firm has better capability to forecast the economic
changes.
The firm has a better knowledge of prevailing market scenario.
Number of Large firms is more than the number of Small firms.
The firm initiates well publicized changes in price.
• Example :

In 2002 Coca Cola introduced

the 200 ml bottle for Rs 5.

Pepsi followed in just 5 days

to keep their market share
• Small firms lack sufficient knowledge into the principle
of costing. They can utilize the big firm’s costing
department by being price followers

• Leads to price stability avoiding price wars to an extent

• Price will not be too high during boom periods and not
too low during recessions (as price leaders take a long
run point of view)
•All the Price Leadership models are controlled
by a strict MRTP Act

•MRTP Act : Monopoly Restricted Trade Practices

Act (India 1969)

•The MRTP Act restricts the firms from misusing

the Price Leadership Model to engage in illegal
practices.
Thank You