Price leadership

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Tacit collusion occurs when cartels are illegal or overt collusion is absent. Put another way, two China trading company or firms agree to play a certain strategy without explicitly saying so. Oligopolists usually try not to engage in price cutting, excessive advertising or other forms of competition. Thus, there may be unwritten rules of collusive behavior such as price leadership (tacit collusion). A price leader will then emerge and sets the general industry price, with other firms following suit. For example see the case of British Salt Limited and New Cheshire Salt Works Limited.


Forms


Classical economic theory holds that price stability is ideally attained at a price equal to the incremental cost of producing additional units. Monopolies are able to extract optimum revenue by offering fewer units at a higher cost. An oligopoly where each firm acts independently tends toward equilibrium at the ideal, but such covert cooperation as price leadership tends toward higher profitability for all, though it is an unstable arrangement.


In barometric firm price leadership, the most reliable firm emerges as the best barometer of market conditions, or the firm could be the one with the lowest costs of production, leading other firms to follow suit. Although this firm might not be dominating the industry, its prices are believed to reflect market conditions which are the most satisfactory, as the firm would most likely be a good forecaster of economic changes.



References:

1.http://en.wikipedia.org/wiki/Price_leadership


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