Price leadership

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Price leadership is an observation made of oligopic business behavior in which one company, usually the dominant competitor among several, leads the way in determining prices, the others soon following. In the long run price leadership could have a negative impact on the dominant firm. Over time, as the supply from the fringe (smaller) competitors in the market increases the residual demand of the dominant firm decreases. In such a scenario, if the dominant firm intends to continue as the price leader in the market, it can do so only at the cost of decreasing its supply to the market, consequently sacrificing its market share. Unheeded to, the gradual loss in market share could see the once dominant player lose its position of dominance in the market.

Classical economic theory holds that price stability is ideally attained at a price equal to the incremental cost of producing additional units. Monopolies are able to extract optimum revenue by offering fewer units at a higher cost.

An oligopoly where each firm acts independently tends toward equilibrium at the ideal, but such covert cooperation as price leadership tends toward higher profitability for all, though it is an unstable arrangement.