PRICE LEADERSHIP UNDER OLIGOPOLY
In an oligopolistic situation. there are more than two or a few sellers who arc able to exercise monopolistic influence. such a market situation. We generally find that there exists what is called the ‘price leadership’. Under price leadership. one finn a surnes the role of a price leader and fixes the price of the product for the entire industry. The other firm in the industry simply follow the price leader and accept the price fixed by him and adjust their output to this price. The price leader is generally a very large or a dominant firm or a firm with the lowest cost of production. It often happens that price leadership is established as a result of price war in which one firm emerges as the
Thus. we find that in an oligopolistic market situation. it is very rare that prices are set independently and there is usually some understanding among the oligopolist is operating in the industry. This understanding or agreement may be either-tacit or formal. In the case of a formal agreement. the oligopolist agree to observe some rules of conduct as regards price. output. etc. They may have a written agreement which may also provide Ior violation of agreement. However, generally the agreement is more tacit than formal. The tacit agreement implies that there arc no consultations or discussion: the oligopolists have only an understanding among themselves and follow a uniform and agreed policy with regard to price. output. etc. It is this tacit agreement which usually a feature of price leadership. That is, under price leadership there is no formal agreement or selling up of an agency to control and regulate the activities of the firms in the industry. Some times. however, price leadership may emerge from a formal agreement among the rival firms ill which a leader is chosen whom the other firms in the industry agree to follow in selling the price.A dominant firm is one which has a large capacity to produce and sell in the market. In oligopoly such a practice is possible. It is a very efficient and livc firm as such can dominate the market. it can produce the goods at possible lowest cost then thc other small firms exists in the market. We that the dominant leader has the knowledge of supply of small firm as well as the total demand for ‘lit’ product in the market.
I hreh i< explained in the right hand side dmgraru, which is equal to the main diagr.nu it i arc several types of leadership. The following arc the principal types:
(II) f a dominant Firm, Under the PC of price lcd chip. it is found that there is generally one among the firms operating ill the indu vn y, which produces the hull, of the product of the indusu y. 13) virtue of this position, it is able to dominate the entire market. It sets the price and the other finns accept telus pncc. 1 he other iuns arc not in a Loutil to exercise any influence the market price. Naturally the dominant firm, considering it interest. fixes a puce ‘0 as to maximize its profits. ‘I he other fit ms have to adjust their output to tlte price so fixed hy the dominant firm, type of price leadership. an old. experienced and the largest lum assumes the rule of a leader,under, like al protect the intcr t of all firms in-read merely promoting its UWII crcst. In a way acts as the l’u\lodian of firms accounting in the industry, fixes a price which i, found Thc suitable for all the Inns in tltc indusu y.hi price fixed by taking into conviction the market conditions the regard to the dcmund tor till’ product. cost of production, competition from the 1 ival producers, etc. SInce the interest of all linll’ arc protected hy this dominant firm, all the fit nl’ in the industry ale only tou willing tll follow the price leader.