What does price leadership refer to?

Price leadership refers to a situation in an industry where one dominant firm sets its prices and other firms in the market follow that lead. This dominant firm typically has a significant share of the market and the ability to influence prices due to its scale, brand strength, or overall market power. When this firm raises or lowers its prices, smaller firms often adjust their prices accordingly to remain competitive and avoid losing market share.

This dynamic can help stabilize prices within an industry, because when one firm establishes a price point that others adhere to, it minimizes price wars and fosters a level of predictability in pricing. It's important to note that while price leadership involves some level of interdependence among firms, it is not a result of collusion or formal agreements between firms, which distinguishes it from practices such as price-fixing.