Price leader

A price leader is a business or company whose pricing decisions heavily influence its competitors.

Price leaders in any industry are big firms in that industry. Price leaders may be just one or several firms acting alone or in collusion in order to dictate price changes.

Collusion between firms is illegal, especially when it comes to pricing. In reality, however, many industries are oligopolies, which means that the industry market is dominated by several firms.

These oligopolies know the law and so never really commits collusion overtly. However, what they usually do is act as price leaders and have an unwritten agreement to adjust their prices when the “designated” price leader does. In essence, they act as one.

This is very important for them if they want to make sure that none of the other bigger firms end up undercutting them. This is, of course, not good for the customer because prices stay up even when they can be lowered since the competition isn’t really acting as competition. Price collusions may also be hard to prove, even when already obvious, since there is no written agreement between the companies.

In cases when price leaders do not collude with other companies to keep the prices up, but instead drive the prices lower, the price leader can be called a loss leader. Loss leaders usually drive the price down in order to get an even larger market share. Competitors are forced to follow suit even if it means a smaller profit margin or even a loss.

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