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Price leadership Model

Oligopoly. Price leadership Model. Types of price leadership. Types of price leadership Price leadership by a low cost firm Price leadership by the dominant firm Barometric price leadership Exploitative or aggressive price leadership. Low Cost Firm. Low cost firm.

austin-cummings
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Price leadership Model

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  1. Oligopoly Price leadership Model

  2. Types of price leadership • Types of price leadership • Price leadership by a low cost firm • Price leadership by the dominant firm • Barometric price leadership • Exploitative or aggressive price leadership

  3. Low Cost Firm

  4. Low cost firm • Price leadership by low cost firm • Assumptions 1. Each of the two firms has equal share in the market (demand curve facing each firm will be the same and will be half of the total market demand curve of product)

  5. Each of the two firms has equal share in the market $ D (Market demand) d (Firm demand) MR O Q per year

  6. Low cost firm 2. There are two firms, A and B. the firm A has a lower cost of production than B. 3. The product produced by the two firms is homogeneous so that the consumers have no preference between them.

  7. the firm A has a lower cost of production than B. $ MCb ACb MCa P ACa D (Market demand) d (Firm demand) MR O Q per year

  8. The firm A will maximize it's profit by selling output OM and setting price OP $ MCa P ACa D (Market demand) d (Firm demand) MR O M Qtotal Q per year

  9. The firm B's profit will be maximum when it fixes price OH and sells output ON. MCb ACb MCa H P ACa D (Market demand) d (Firm demand) MR N M Qtotal O

  10. Low cost firm • Since the two firms are producing a homogeneous product, they cannot charge two different prices. • Because the profit maximizing price OP of firm A is lower than the profit maximizing price OH of firm B, firm A will dictate the price to the firm B and will emerge as a price leader and firm B will follow.

  11. Both firms will charge price OP and sell OM MCb ACb MCa P ACa D (Market demand) d (Firm demand) MR O M Qtotal

  12. Dominant Firm

  13. Dominant firm • There exists price leadership by a dominant firm which has a large share of market with a number of smaller firms as followers each of them has a small share of market. • Assumptions • Dominant firm knows thetotal market demand • Dominant firm knows the marginal cost of the smaller firms whose lateral summation yields the total supply by the small firms at various prices.

  14. (Supply of small firms) $ Total Market demand O Q per year

  15. With these information, the leader can obtain his demand curve. Demand fulfilled by small firms $ $ P1 D Leader demand O Q per year Q per year

  16. Demand fulfilled by small firms The dominant firm will maximize it's profit by selling output OQ and setting price OP $ MC P P D Leader demand MR O O Q Q per year Q per year

  17. Dominant firm • Dominant firm have 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.

  18. Barometric price leadership

  19. Barometric price leadership • All firms agree to follow the price change made by a firm which supposedly has good knowledge of the market conditions and thus can forecast future happening in the market better than others. • Followers are not required to make continuous costs on demand calculations.

  20. Aggressive price leadership

  21. Aggressive price leadership • Dominant firm compel the other firms in the industry to follow him in respect of price. Such a firm will often initiate a move threatening to compete the others out of the market if they do not follow him in setting their prices.

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