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It is the concept where a dominant organization establishes the price, which is accepted and followed by others in the same industry.
Such companies make a change in the market value of goods manufactured or set market pricing within a predetermined short period followed by the other firms making a rate alteration of exactly the same monetary amount in the same direction on the same product(s), where they are doing so significantly more often than expected.
It allows one firm to set a higher price for a less valuable product to earn higher profits.
There are many different types of price leaderships –
• Collusive is the condition where the competitors tactfully agree to follow the dominant firm.
• The overwhelming market is where if one company has by far the largest share, its much smaller competitors have no alternative than to follow the leader.
• Trend knowledge refers to the condition where one company may be unusually good at spotting trends and others follow its pricing leadership than to make use of their own resources to research on it.
There can be disadvantages of financial products strategy where the industry may accept one company as the leader and others face a reactive step for going against the dominant player. Nevertheless, in the condition of a price war, the firms may fail to gain.
There can be a weakness in strategy if there are occasional changes in the identity of the leader and the absence of leader power can result in price reductions. Such leadership behavior can be seen in a British supermarket that involves firms like Tesco and Asda.
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