Economics Quiz
A low-cost price leader can enforce leadership through implied threats by offering deals and prices of goods and services that the rival firms have to respond to if they are to remain relevant in the market (Yano and Komatsubara 1025). New emerging firms are the ones in the best position to have this effect on existing ones in the market. The small companies often focus on a just one or few customer segments. The rest of the firms in the market have to respond with counteroffers. Failure to respond can lead to losing that segment of customers.
A company can become a low-cost leader if it has the ability to affect the actions of the rivals. This can be done by the firm strategizing, bluffing and making offers that force the competition to respond by offering lower prices themselves. Becoming a low-cost price leader can best happen in a market for goods that have little differentiation from each of the firms involved (Yano and Komatsubara 1026). Some of the conditions that have to be met before a firm can effectively become low-cost price leader include the number of firms in the industry being small, restricted entry into the industry, homogenous products across the firms, inelastic or less elastic demand for the goods and services, and the competitors having the same long run average total cost.
The market structure that is most susceptible to implied price threats is an oligopoly. Such a market tends to have a few dominant players whose actions are bound to elicit a response from the rivals (Steinmetz). An example of an oligopoly is the market structure in which Walmart and Amazon compete. Both companies have substantial influence in the market and claim to have the lowest prices. The price leadership between them shifts from one to the other periodically.
Work Cited
Yano, Makoto, and Takashi Komatsubara. “Price Competition or Price Leadership.” Economic Theory 66.4 (2017): 1023-1057. Web. doi:10.1007/s00199-017-1080-x
Steinmetz, Alexander. “Price And Inventory Dynamics In An Oligopoly Industry: A Framework For Commodity Markets.” The B.E. Journal of Theoretical Economics 16.1 (2016): n. pag. Web. doi: 10.1515/bejte-2014-0064