Price Leadership Paper

1055 Words 5 Pages
In an industry, price leadership is the act that a company becomes the leader to determine the price of goods and services. The company, price leader, is often larger than other companies. Price leader determines the prices and other competitors have no alternative, need to lower their prices in order to compete and remain the market share. This type of pricing strategies is common in the oligopolies, which means fewer sellers in a market, for example oil companies, airline industry. Price leadership usually happens when there is no highly differentiation of the products. It is because when a company lowers the price of the products, customers will choose to buy from them, other competitors have no choice and forced to lower their price also to keep their market share, since their product is similar to the price leadership company, customers will choose lower price instead of other price higher than that.
There are three types of price leadership which have identified by economists:
a) Dominant price leadership
There is a large scale of firm dominate the whole industry and thus have a big market share. In the
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variable costs. With variable (or marginal costs) pricing, a price is set in relation to the variable costs of production, ignoring overheads and fixed costs. (Jim Riley, 2012) Marginal pricing strategy often used by businesses during periods of poor sales. For instance, marginal cost of an item is RM5.00 and normal selling price is RM6.00, the company which use marginal pricing strategy will lower the price to RM5.10 if the demand is declined. The 10 cents of incremental profit is better than no sale at all so the company will approach this strategy. The benefit of marginal pricing is that the lower price will enable the increase of customers demand. This strategy can also be used by small businesses to boosts short-term

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