BAROMETRIC AND DOMINANT PRICE LEADERSHIP

BAROMETRIC PRICE LEADERSHIP

It occurs when the leading firm is followed merely because the price it sets reflects the market forces and the needs of the other firms in the industry.

Effects: The rival firms accept the change in price in order to retain its market share. It leads not because it is large but because it is agile, and competitors find it easier to simply follow its lead than to discover the source of the market shift for themselves.

Example
In 2002, coca Cola introduced the 200ml bottle for Rs5.

Pepsi followed in just within 5 days to keep the market share.

Example
The automobile industry: In 2000, the Maruti Udyog Ltd. announced a price cut on its Omni model. The other firms were compelled to announce price cuts due to declining demand for domestic industry.

DOMINANT PRICE LEADERSHIP

It occurs when the leading firm is powerful enough to set a price which all other firms will be forced to follow.

Behavior: price cutting and profit maximization

Effects: Rival firms behave like firms in a competitive market

Example
State bank of India has always been the dominant firm in the Indian market, it fixes the rate of interest and the other banks soon follow the pricing.

Example
Starbucks is a dominant-firm price leader, with smaller chains and independent cafes being forced to price accordingly or else lose business.

DOMINANT PRICE LEADERSHIP (CONTD.)

(a) : Market Demand-Supply curve of Small firm

D Dm = Market demand Curve P1SS = Supply Curve of Small Firms

(b) : Market Demand curve of Dominant firm P3DD = Demand Curve of Dominant Firm P3 MPD = MR of Dominant Firm

THE DOMINANT FIRM

Dominant firm has to ensure that the small firms will produce only the remainder of demand (not more) otherwise the dominant firm will be pushed to a non-maximizing position.
This implies that if price leadership is to remain, there must be some definite market sharing agreement.

THE DOMINANT FIRM

Strategies for the smaller firms include: product differentiation, cost-cutting, and instituting new ways of distributing the product and serving the customer. When a company aggressively lowers prices specifically because it knows the smaller companies cannot sustain a lower price point, this is called predatory pricing.

PRICE LEADERSHIP OF THE DOMINANT FIRM

DT is the demand curve facing the entire industry. MCR is the summation of the marginal cost curves of all of the follower firms. You can think of MCR as a supply curve for these firms. In choosing its price, the dominant firm has to consider the amount supplied by the follower firms.

PRICE LEADERSHIP OF THE DOMINANT FIRM

For any price chosen by the dominant firm, some of the market demand will be satisfied by the follower firms. The residual is left for the dominant firm. The demand curve facing the dominant firm is found by subtracting MCR from DT. This residual demand curve is labeled DD.

PRICE LEADERSHIP OF THE DOMINANT FIRM

To determine price, the dominant firm equates its marginal cost with the marginal revenue from its residual demand curve. The dominant firm sells A units and the rest of the demand (QT A) is supplied by the follower firms.

PRICE LEADERSHIP OF THE DOMINANT FIRM