Price and leadership are two different words but in the context of marketing these two terms are combined and it becomes price leadership. Price leadership is the term used in the context of marketing, it refers to that practice by which one big firm changes the price charged for product or service and other smaller firms follow that big firm when it comes to pricing and that big firm or company is called price leader. Example of price leadership is when one big telecom company reduces the tariffs for calls and internet than other telecom companies also joins the race and reduces their call and internet rates. There are three types of price leadership, let’s look at these types in detail –
Dominant Firm Price Leadership
In this type of leadership one company which has highest market share decides the price of the product or service and other smaller companies follow the company. Hence if the company increases the price of product or service than other companies will also increase the price and vice versa. Hence for example in case of mobiles if Samsung and Apple reduce the price of mobiles than other players will also have to rethink their pricing strategy.
Collusive Price Leadership
In case of this type of price leadership, more than one company decides to increase the price together and since these companies have substantial market share its results in the price of product rising or falling depending on the decision by these companies. This type of strategy is followed usually for those products or services where there is oligopoly form of market structure. One of the examples of collusive price leadership is that of airline industry where they all increase or decrease the price of airline tickets simultaneously.
Barometric Price Leadership
In this type of price leadership size of the company does not matter rather one company in the industry is considered a barometer for other companies operating in the same industry and due to other company follows that one company so as to decide the future course of action with regard to the price of product or service. In simple words to acts as barometer size of the company is not looked upon rather its cost efficiency and other factors are considered before deciding the company which should act as a barometer for other companies in the industry.
As one can see from the above that when it comes to marketing there are three types of price leadership and any company thinking of changing the price of its product or service should first analyze the action of the industry leader and then decide its own price.