Cambridge International as and a level Economics Ebook

particular market.
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Limit pricing has a diff erent objective to predatory 
pricing. Limit pricing seeks to keep new firms out of a 
market whilst predatory pricing seeks to remove existing 
firms from the market.
Price leadership
Price leadership
 
is a common feature of oligopolistic 
markets. All fi rms in the market accept the price that 
is set by the leading fi rm, which is oft en the one with 
the largest market share or the brand leader. Th
ey then 
alter their own prices in line with those of the leader. 
It is seen as a way of avoiding price competition yet 
maximising total profi ts for all fi rms while allowing 
various forms of non-price competition to prevail. A 
good example in many countries is petroleum retailing 
where the market leader is a well-known MNC. Other 
examples are in the markets for certain types of retail 
goods or branded fast food.
Output
0
1
2
3
4
5
6
Cost and r
evenue
MC
ATC
MR
MC = MR
AR
100
90
80
70
60
50
40
30
20
10
A
B
Figure 7.26 
A price discriminating monopolist
185
Chapter 7: The price system and the microeconomy 

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When the leading fi rm announces a price increase, all 
others quickly follow, sometimes in just a matter of hours. 
It is the same when a price fall is announced; smaller rivals 
are forced to follow the fall in price to retain market share. 
Th
e downside, however, is that since their costs are higher, 
matching a price decrease could result in sustained losses 
and their eventual exit from the market.
Figure 7.27
 shows a simple representation of price 
leadership. It assumes there are two fi rms in the market, 
A
and 
B
. DD is their demand curve. Firm 
A
is the lower 
cost producer and price leader. It maximises its profi ts at 
point 
A
where MC 
=
MR. Its output 
O
A
is sold at price 
P
A
. 
Firm 
B
’s ideal price is at 
P
B
but if it fi xes price here, it will 
not be able to compete with A’s lower price. It is therefore 
compelled to lower its price to 
P
A
with lower profi ts due to 
its higher costs of production.