What is Barometric Price Leadership?
Price leadership occurs when an organization is in a position to dictate the prices in the market. Their position is such that they significantly influence the prevailing prices of the goods or services. In other words, they have a controlling and an upper hand in moving the prices of their offerings in whichever direction they like. Because of their dominant position, the other market players are forced to follow the price leader and set their prices accordingly. Barometric price leadership is one of the three types of price leadership. The other two types are dominant price leadership and collusive price leadership.
In our literal meaning, one of the firms of the Industry is referred to as the barometer of pricing. Or for that matter any changes in the features of the product etc. And that firm remains the initiator or leader in terms of changes. Hence, it is called the barometer of that industry.
- What is Barometric Price Leadership?
- Barometric Price Leadership Model
- How does Barometric Price Leadership work?
- What are the favorable conditions for the success of Barometric Price Leadership?
- What are the limitations of Barometric price leadership?
Barometric Price Leadership Model
Barometric price leadership is a price leadership model in which one firm is in a position to assess and identify the right direction of price movement in the near future. It is not necessary that this firm is very large in size. Even a small firm can become a barometric price leader. Such firms have keen eyes and a sharp ability to gauge the correct direction in which the prices will move in the market. Other players start following this price leader after they are assured of the skills and correct judgment of the barometric price leader over a certain period of time.
The competition in the market starts believing that this firm has some inside news or knowledge that others do not have. This knowledge helps the firm correctly guess whether the prices will rise or fall in the near future. Also, such leadership is more prevalent in markets that are oligopolistic in nature. There are limited numbers of players in the market. Thus, the participants face the danger of losing their market share to the barometric price leader if they do not follow his price recommendations.
How does Barometric Price Leadership work?
The barometric price leader is similar to a “barometer” of the current market situation. It is skillful at assessing the change in prices of the goods or services in the near future due to changes in the condition of the market, consumer demand pattern, input material costs, or a variation in the cost of production. These are a few of the reasons that can affect the price of the product, and the actual reason can be different too.
It is not that the market players are incapable of judging the upward or downward change in the current prices. The difference is in the speed and accuracy of such predictions each and every time any of the above instances occur. Moreover, sometimes companies avoid spending on the research and manpower that is required to constantly keep track of the market forces that can affect the price of their product or service. They may find it more beneficial to simply follow the barometric price leader and his judgment and change prices accordingly.
Sometimes the barometric price leader can be a small player in the market. Also, it doesn’t need to be a low-cost firm. Hence, he may have limited powers to impose the market prices of the goods and services on the other players and sustain them for long. Thus, barometric price leadership can be temporary and for a short period of time.
What are the favorable conditions for the success of Barometric Price Leadership?
There are a number of conditions that are favorable for the success of barometric price leadership.
Barometric price leadership usually exists successfully in markets with a cordial relationship between the market participants. This is so because no firm will accept some other company as a leader and follow it for long if there is intense rivalry among them.
Dedicated pricing team
A barometric price leader often engages a dedicated team for competitive intelligence, research, and studying the market and its participants. The team does intensive pricing research, monitors the dynamics of the industry, and adjusts its strategy accordingly.
The efforts of this full-time team ensure that the price leader is always one step ahead of the competition with regard to the pricing of its products. Also, smaller firms without a dedicated pricing team fail to stay the price leader for long and lose their seat to other bigger players in the market.
Price is not the sole factor in deciding and influencing purchases. A firm cannot stay a price leader for long solely by cutting prices and selling at heavy discounts. It should offer its customers value and a sense of satisfaction through its offerings. If the firm offers good quality products with a decent variety that provides utility to a customer, it can stay a barometric price leader for long.
What are the limitations of Barometric price leadership?
Barometric price leadership has a number of limitations too. Some of them are as follows:
Wiping off the competition
Barometric price leadership often totally wipes out the smaller players from the market. They are unable to match the price leader’s rate cuts for long. On the other hand, the barometric price leader is usually big and enjoys economies of scale and scope. This helps it to sell the products at a lower rate and still earn some profits.
Thus, the smaller players in the market suffer badly when the price leader follows a price drop strategy to increase its market share. They struggle to match the leader’s pricing and are eventually forced to exit the market.
Flawed assumption of homogeneous products
The theory of barometric price leadership is based on the assumption that the goods and services that the market players offer are homogeneous and similar in nature. Price is the only differentiating factor between them. It assumes that customers will buy the products that are of the lowest price. However, this assumption is flawed and does not hold true each and every time.
In the real world, the products and services that companies offer are rarely similar. Each offering comes with a unique utility that other companies do not offer. For example, in the airline industry, the basic service that the airline provides is transportation. However, their offering varies widely depending upon the service quality and amenities they provide during the journey. Many consumers prefer to fly with premium airlines, and price becomes the secondary factor in choosing the service.
Barometric price leadership is a useful strategy for both large and small players in the market. Particularly for those who want to take the role of a price leader. The most useful aspect of such price leadership is that it provides benchmarking of prices. Smaller players need to simply follow the steps of the barometric price leader. And alter the pricing of their products or service accordingly. In turn, it saves them from the trouble of investing in extensive pricing research and market study.
However, one should always be careful while following the barometric price leader. Every operator’s business model is different. Hence, firms should not blindly follow the pricing decision of the leader. Also, there is a chance that the leader’s decision may go wrong in some instances. Thus, every market participant should use some research and judgment of its own as well rather than just blindly following the barometric price leader.
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