Meaning, assumption, benefits, and limitations of dominant price leadership

What Is Price Domination?

When the market leader sets a price for his or her goods or services, most of the industry’s market participants follow suit. Leadership solutions and follower solutions are both examples of this kind of approach. Price leadership is a system in which one dominating market participant sets the price for all other players in that particular market. The rest of the market just follows the dominating price leader’s prices. When it comes to market share, the dominating price leader often has a share of more than 50% of total production. It’s hard to tell how big the other guys are since they don’t create anything. As a result, they are not strong enough to affect the market pricing. They’re the ones who take the sting out of things.

It’s not uncommon for the leading pricing leader to become a monopolistic power. The market price is disrupted, and predatory pricing may be implemented. For short-term losses, it is able to sell at prices much below its cost because of its vast scale. In order to compete, the smaller companies must cut their pricing. There is a risk that they may be driven out of the market because they keep selling at losses. It is only when they go that the price leader puts back the usual level of pricing. Due to the lack of competition, it has the freedom to charge whatever it wants, even if it means raising the price from previous levels. As a result, it has the potential to make unanticipated gains and take control of the market.

Models for Dominant Pricing Leadership

The dominating pricing leadership model is based on a number of assumptions.

A single, large, and powerful business

The dominating pricing leadership model assumes that there is only one company in the industry that controls more than half of the market share. Only a small number of larger companies have a significant part of the market.

Price-Maker

Price makers in the market are assumed to be huge, powerful players. Product or service prices are determined by supply and demand. The price gougers are the other, smaller businesses.

Demand curves that are perfectly elastic

In the dominating pricing leadership paradigm, the demand curves of smaller companies are fully elastic. They are able to sell at the same price as the dominating company at any time. The other companies in the market will steal their whole sales if they even attempt to raise the price of their goods a little bit.

Products with the Same Chemical Composition

Products from diverse providers are assumed to be homogeneous. They are identical in terms of quality, appearance, functionality, and so on. Only in terms of price are they different.

Dominant Price Leadership Model’s Pros and Cons

The dominating pricing leadership model has the following advantages:

Increased Profits and Higher Prices

Product and service prices may rise as a consequence of price leadership in the market. As a consequence, everyone involved in the market benefits. When the dominant price leader makes its prices high, this is known as “price gouging.” As a result, all other market participants profit from its pricing strategy.

The dominant pricing leadership model encourages investment in activities like research and development because of the higher profits that are generated. This aids in the creation of new items as well as the improvement of already existing ones. It’s a win-win situation for everyone: consumers get better quality items and greater variety, while suppliers benefit from increased sales volume and money.

Inhibits Price Battles

Pricing wars between several minor market competitors may be avoided thanks to the dominating price model. In nature, the items they provide are homogenous. Thus, the only variation between the two products is in the price. The lesser players may launch a pricing war if there is no dominating player establishing the prices. This will lead to a decrease in earnings or perhaps a loss of money in the market.

Everyone in the market pays what the dominating player charges. A pricing war is less likely to break out because of this.

Boosts Market Growth and Harmony

Using the dominant price leadership paradigm, all sellers are placed on an equal footing in terms of pricing. As a result, they will not have to compete with each other on pricing. It is at this point that they begin to endeavor to improve and develop the market as a whole.

Is dominant price leadership constrained?

The prevalent pricing leadership paradigm has a number of drawbacks.

Consumers face high prices

If the dominant price leader sets a higher-than-average price for the products or services in the market, customers are often left out in the cold. In order to keep up with the leader, the whole market will have to pay a premium price for their goods and services. The customer is unable to negotiate lower costs and, as a result, suffers.

Small business loses out

To remain in the market, smaller businesses may lose out on business if a dominating pricing leader decreases the cost price of their products or services. The market leader has economies of scale that smaller enterprises do not. As a result, their manufacturing costs are often greater. Predatory pricing, on the other hand, may be used by the dominant price leader in order to drive out the competitors. In the long term, this might result in large losses for the smaller players, which could ultimately lead to their demise.

Malpractices are encouraged

Smaller enterprises attempting to compete with the leader’s pricing may be encouraged to engage in unethical acts by the dominating price leadership model. It is possible for them to engage in unethical trading tactics, such as delivering items that are too little or too light in order to compete with the dominating price leader and yet make money.

Dominant Price Leadership is the final conclusion

In order for the dominant pricing leadership model to be effective, small businesses must be able to sell at the market leader’s prices while still making a profit. Because the pricing remains consistent across the market, they will be able to sell a lot of stuff. As a whole, the market will flourish. Although the customer can’t haggle and is thus obliged to acquire the products or services at a price set by the dominant price leader, the consumer may suffer as a result.

However, this seldom occurs in the current world. Smaller businesses have been forced out of business by the dominant price leader’s predatory pricing tactics. As a consequence, a monopoly is formed, which opens the door to long-term abuse of customers and other stakeholders. As a result, governments should take steps to monitor and rein in these pricing leadership models, enacting stringent legislation to address any problems that may arise.

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