A commonly observed pattern of behavior in oligopolistic industries is the
situation where one firm sets a price or initiates price changes, and other firms
follow the leader with a short time lag, usually just a few days. There are various
ways in which such behavior can occur, depending on two main factors.
1. Product differentiation. For homogeneous products the followers normally
adjust their prices to the same level as the leader. In the more common case of
differentiated products the price followers generally conform to some structure
of recognized price differentials in relation to the leader. Thus Ford may
adjust the prices of various models so that they are given percentages lower or
higher than some benchmark GM model.
2. Type of leadership. There are two main possibilities here. Dominant price
leadership refers to the situation where the price leader is usually the largest firm
in the industry. In this case the leader is fairly certain of how other firms will react
to its price changes, in terms of their conforming to some general price structure,
as described above. This certainty may be increased by the implicit threat of
retaliation if a competitor does not follow the leader. The other main type of
price leadership is called barometric. This time the price leader is not necessarily
the largest firm, and leaders may frequently change. There is more uncertainty
in this case regarding competitive reactions, but the leader is normally
reacting to changes in market demand or cost conditions, and suggesting to other
firms that it is in their interests to follow the changes.
When prices and outputs are determined under a price leadership situation
there is no explicit collusion among firms, even though the almost simultaneous
price changes may cause consumers and regulatory authorities to be
suspicious. In the next chapter we shall see what makes firms conform to such
changes so quickly. The following case studies examine the factors which can
affect the success of collusion in two industries that have been exposed to the
media spotlight.