What Is an Established Price?

The Price Leadership Model refers to the competition pattern in which a company in the industry changes prices first, and then other companies follow pricing.

Price leadership model

Types of price leadership models

1. Price leadership of large manufacturers or leaders of dominant enterprises

If there is a large-scale manufacturer in the industry and the rest are smaller ones, then the large manufacturer can determine a market price, even if its own profit is the largest, and enable other manufacturers to sell the output they can hope to sell. Once other small manufacturers realize this, they would rather accept the price set by the big manufacturers and act like a complete competitor. Determine your own production and sales quantities at a set price. The market left by all small manufacturers after selling according to their determined quantity is owned by the large manufacturers.

In Figure (1), DD '(straight line) is the demand curve of the oligopoly market, MCB is the marginal cost curve of the dominant manufacturers, and MC curve is the sum of the marginal costs of other small manufacturers. Because small manufacturers are price takers. Same as the perfect competition situation. They are always produced at MC = P, so their marginal cost curve above their average variable cost can represent their supply curve. If the number of small manufacturers is ten, they have exactly the same cost situation. When the output of each small manufacturer is 4 units, the average variable cost is at least 4 yuan, so the marginal cost curve above 4 yuan is the small manufacturer supply curve. According to the existing market demand curve and the supply curve of all small manufacturers, the demand curve faced by large manufacturers can be introduced. The curve HMGD 'is exactly the demand curve of a dominant manufacturer. The demand curve of large manufacturers is formed by subtracting the surplus of small manufacturers' supply from the overall market demand at each price. When the price is 12 yuan, the entire market needs 120 units. At this time, the supply of small manufacturers is exactly 120 units. That is, all products required by the market are supplied by small manufacturers, and the market demand for large manufacturers is zero. When the price is 4 yuan, the total market demand is 200 units, the small manufacturers supply 40 units as a whole, and the remaining 160 units can be regarded as the demand for the products of large manufacturers. When the price is lower than 4 yuan, small manufacturers stop supplying. The entire market demand belongs to big manufacturers. According to the market demand curve faced by large manufacturers, the marginal profit curve MR of the large manufacturers can be made. According to MCB = MRB, the equilibrium output of the large manufacturers can be determined to be 40 units and the equilibrium price is 10 yuan (as shown by point N). According to this combination, large manufacturers achieve marginal benefits equal to marginal costs, thereby maximizing profits. This price will be accepted by small manufacturers. Small manufacturers will provide 100 units of product at this price (as indicated by F).

2. Price leadership of low-cost manufacturers

When market competition is fierce, oligopoly monopolies are trying to keep their products on the market. Often you have to give up the equilibrium price at which you can get the highest profit, and use the equilibrium price of the lowest profit point of the low-cost manufacturer as your sales price. otherwise. High-cost manufacturers lose market by pricing at maximum profit.

Economic implications behind the price leadership model

In the price leadership model, leading manufacturers are in a more active position, while other manufacturers are in a more passive position. But for the leading manufacturers, they must accurately understand the production demand curve and the supply curves of other manufacturers in order to determine the output and price at which their profits are maximized. For the following manufacturers, they are only the receivers of the price and determine their profit maximization The output and price are much easier.

In the model of the oligopoly market, the explanatory power of the price leadership model is not high. When the price leadership model derives the follower's supply curve, it relies on the proposition that "the supply curve is the sum of the marginal cost curve in the horizontal direction". The problem is that this proposition was originally only applicable to competitive markets. If there are many small manufacturers, the market cannot be called an oligopoly market; and if there are several large manufacturers with similar strength, there is no reason for other manufacturers to be price receivers. In fact, there is a more appropriate model to describe this situation, the output leadership model. The implication is that a certain manufacturer decides the output first.

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