1. Price leadership Model
Oligopoly
Price leadership Model

2. Types of price leadership
Price leadership by a low cost firm
Price leadership by the dominant firm
Barometric price leadership
Exploitative or aggressive price leadership

3. Low Cost Firm

4. Low cost firm Price leadership by low cost firm Assumptions
1. Each of the two firms has equal share in the market (demand curve facing each firm will be the same and will be half of the total market demand curve of product)

5. Each of the two firms has equal share in the market$
D (Market demand)
d (Firm demand) MR O
Q per year

6. Low cost firm
2. There are two firms, A and B. the firm A has a lower cost of production than B.
3. The product produced by the two firms is homogeneous so that the consumers have no preference between them.

7. P the firm A has a lower cost of production than B. $ O Q per year MCb
ACb
MCa P
ACa
D (Market demand)
d (Firm demand) MR O
Q per year

8. The firm A will maximize it's profit by selling output OM and setting price OP$
MCa P
ACa
D (Market demand)
d (Firm demand) MR O M
Qtotal
Q per year

9. The firm B's profit will be maximum when it fixes price OH and sells output ON.
MCb
ACb
MCa H P
ACa
D (Market demand)
d (Firm demand) MR N M
Qtotal O

10. Low cost firm
Since the two firms are producing a homogeneous product, they cannot charge two different prices.
Because the profit maximizing price OP of firm A is lower than the profit maximizing price OH of firm B, firm A will dictate the price to the firm B and will emerge as a price leader and firm B will follow.

11. Both firms will charge price OP and sell OM
MCb
ACb
MCa P
ACa
D (Market demand)
d (Firm demand) MR O M
Qtotal

12. Dominant Firm

13. Dominant firm Assumptions
There exists price leadership by a dominant firm which has a large share of market with a number of smaller firms as followers each of them has a small share of market.
Assumptions
Dominant firm knows the total market demand
Dominant firm knows the marginal cost of the smaller firms whose lateral summation yields the total supply by the small firms at various prices.

14. (Supply of small firms)$
Total Market demand O
Q per year

15. Demand fulfilled by small firms
With these information, the leader can obtain his demand curve.
Demand fulfilled by small firms $ $ P1 D
Leader demand O
Q per year
Q per year

16. Demand fulfilled by small firms
The dominant firm will maximize it's profit by selling output OQ and setting price OP $ MC P P D
Leader demand MR O O
Q per year Q
Q per year

17. Dominant firm
Dominant firm have to ensure that the small firms will produce only the remainder of demand (not more) otherwise the dominant firm will be pushed to a non-maximizing position.
This implies that if price leadership is to remain, there must be some definite market sharing agreement.

18. Barometric price leadership

19. Barometric price leadership
All firms agree to follow the price change made by a firm which supposedly has good knowledge of the market conditions and thus can forecast future happening in the market better than others.
Followers are not required to make continuous costs on demand calculations.

20. Aggressive price leadership

21. Aggressive price leadership
Dominant firm compel the other firms in the industry to follow him in respect of price. Such a firm will often initiate a move threatening to compete the others out of the market if they do not follow him in setting their prices.