A Level Economics AQA Practice Exam

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What is price leadership in an oligopoly?

  1. A firm with the largest market share

  2. A form of implicit collusion where one firm changes its price and others match

  3. A strategy to create barriers to entry

  4. A situation where firms compete aggressively on price

The correct answer is: A form of implicit collusion where one firm changes its price and others match

Price leadership in an oligopoly refers to a scenario where one prominent firm, typically due to its size or market power, sets the price for a product or service, and other firms in the market follow suit by matching that price. This leads to a stable pricing environment among the competing firms, as they implicitly collude to avoid price wars that could be detrimental to all involved. By following the price leader, other firms can maintain their market positions without engaging in aggressive price competition. The concept of price leadership is essential in understanding how firms in an oligopolistic market might operate without formal agreements but still manage to coordinate their pricing strategies to some extent. This phenomenon helps maintain certain price levels in a market characterized by few sellers and can illustrate the balance of competition and cooperation that exists in these types of market structures.

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