In 2016, network operator Reliance Jio took the telecom industry by storm, offering free data and calls to all its customers and promising the cheapest tariffs in India. Other major competitors in the telecom sector had to significantly cut down their tariffs to counter the ‘Reliance Jio effect’ and retain market share. This remains one of the best-known examples of price leadership to date. But, what is price leadership? What are the different types of price leadership? Let’s find out!
What Is Price Leadership?
Price leadership is a phenomenon where a dominant organization determines the prices of goods and/or services for the entire market. Such an organization is referred to as a price leader. Price leadership is common in oligopolistic markets with homogenous goods—a market where a small number of large sellers rule over the others, offering similar products. Because there’s no difference in products offered in an oligopolistic market, rival organizations are forced to follow the prices of the price leader to retain market share.
Types Of Price Leadership
Three different types of price leadership have been identified: barometric price leadership, dominant price leadership and collusive price leadership. Let’s explore each in detail.
Barometric Price Leadership
Barometric price leadership occurs when an organization accurately analyzes market trends and consumer demands faster than its competitors. In response to market shifts, the organization then opts to adjust prices or introduce cost-effective means of production. Other organizations follow its lead and start adopting the same prices and/or production strategies to remain relevant.
In 2002, in response to growth in the carbonated soft drinks market, Coca-Cola introduced a 200ml bottle for Rs 5 in India as part of its ‘affordability strategy’. The aim was to make its products accessible to people in both urban and rural areas. Pepsi followed suit, saying the lower prices were part of its agenda to expand its consumer base. This is a barometric price leadership example.
Barometric price leadership depends on an organization’s agility, skill and expertise in identifying market forces. It’s often short-lived because the barometric price leader has little to no power to impose pricing decisions on other organizations that may soon stop following suit.
Dominant Price Leadership
Dominant price leadership happens when an organization enjoys a large market share and can exert considerable influence over prices in the market. While there are other smaller organizations offering similar products in the dominant organization’s territory, they have no power to sway price points.
Dominant firm price leadership often establishes a monopoly in the market, with the leader being able to tweak prices at will. In extreme cases, the dominant firm lowers prices to such an extent that competing organizations, unable to keep up, are forced to exit the market. This is known as predatory pricing and is illegal in many countries.
Collusive Price Leadership
Collusive price leadership occurs when a number of large-scale organizations enter into an implicit or explicit agreement to mutually align their product prices. Smaller players in the market are forced to follow the prices set by the collusive price leaders to remain relevant.
Collusive price leadership is common in oligopolistic markets and industries that have significant barriers to entry. However, collusive price leadership may be frowned upon or considered illegal if it intends to defraud the public.
Irrespective of the type, price leadership yields benefits for leading and small-scale organizations. If the price leader sets higher prices for products, smaller organizations also get increased profits.
Advantages And Disadvantages Of Price Leadership
Despite significant benefits, the various types of price leadership come with their fair share of drawbacks. Here are a few advantages and disadvantages of all types of price leadership.
- Price leadership reduces the probability of price wars, resulting in price stability
- Product quality improves because increased profits allow price leaders to invest in research and development
- Small businesses that don’t have the expertise needed to survey market conditions rely on price leadership to remain relevant
- Small-scale organizations lacking economies of scale struggle to keep up with the low prices set by a price leader and can run into bankruptcy
- Price leaders may become complacent over time and fail to develop a lean cost structure to improve financial stability in the long run
- Once a price leader enjoys complete monopoly, it may pressurize customers to pay more for products by raising prices
An organization can become a price leader only when all other organizations in the market are prepared to follow its lead. It’s important to keep the pros and cons of price leadership in mind before opting for such a strategy.
Lay The Groundwork For Success
Whether your organization is trying to emerge as a price leader or looking to counter the adverse effects of price leadership, you, as an ambitious and growth-driven professional, can help. Harappa’s Creating Solutions course will teach you to uncover the root cause of any problem, avoid common analytical errors and piece solutions together.
You’ll learn about industry-standard practices used by the best professionals across the world. Frameworks such as the Synthesis Technique will make synthesizing results of analyses easier than ever. You’ll be able to draw actionable insights and effectively communicate solutions to stakeholders. Want to lay the groundwork for future success? Sign up for Harappa’s Creating Solutions course today!
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