Price leadership is a pricing strategy that is often observed in oligopoly markets, where a few large firms dominate the market. Under price leadership, one firm in the industry takes the lead in setting prices, and the other firms in the industry follow its lead.
The firm that sets the price is usually the largest or most dominant firm in the industry, and it has the ability to influence the behavior of the other firms. The leader firm sets its price based on its own costs and market conditions, and the other firms adjust their prices accordingly, either matching or slightly undercutting the leader's price.
Price leadership can be either formal or informal. In formal price leadership, the leader firm announces its price to the other firms, and they follow suit. In informal price leadership, the leader's price changes are observed and matched by the other firms in the industry.
The main advantage of price leadership is that it helps maintain price stability in the industry, as the leader firm sets a benchmark for the other firms to follow. This can also lead to higher profits for all the firms, as they can avoid price wars and maintain a stable market. However, price leadership can also be a source of controversy, as it can lead to collusion or anti-competitive behavior among the firms. As such, it is often regulated by antitrust laws to prevent unfair practices and protect consumers.