The price leadership strategy prevails in competitive market environment. The leading firm then makes pricing moves that are duly acknowledged by other members of the industry. Thus, this strategy places the burden of making critical pricing decisions on the leading firm; others simply follow the leader. The leader is expected to be careful in making pricing decisions.
A faulty decision could cost the firm its leadership because other members of the industry would then stop following in its footsteps. For example, if, in increasing prices, the leader is motivated only by self-interest, its price leadership will not be emulated. Ultimately, the leader will be forced to withdraw the increase in price.
The price leadership strategy is a static concept. In an environment where growth opportunities are adequate, companies would rather maintain stability than fight each other by means of price wars. Thus, the leadership concept works out well in this case. In the auto industry, General Motors is the leader, based on market share. The other two domestic members of the industry adjust their prices to come very close to any price increase by General Motors.
Usually, the leader is the company with the largest market share. The leadership strategy is designed to stave off price wars and ‘predatory’ competition that tend to force down prices and hurt all parties. The leaders chastise companies that deviate from this form through discounting or shaving. Price deviation is quickly disciplined.