Solution:

Price leadership:

• Price leadership is imperfect collusion among the oligopolistic firms in an industry with the dominant firm as all firms follow the dominant firm as one of the big firms in an oligopolistic market.

• There is an agreement among all the firms to sell the product at a price set by the leader of the dominant firm in an industry.

• Sometimes a meeting is held and a definite agreement is taken by the dominant firm. In the case of homogeneous or heterogeneous products, the price may be a uniform price and the same is announced by the leader of the firms, for example, price leadership industries are like cement, cigarettes, flour, fertilizers, petroleum, milk, steel, etc. Price leadership may be of different types.

• (i) There is a barometric price in which there is no dominant firm that announces the price but the wisest firm announces the price by taking into consideration the demand and cost conditions and the rest follow suit.

• (ii) When the price is announced by a dominant firm then it is known as dominant price leadership. It is also known as partial monopolistic price leadership.

• (iii) The dominating firm may fix the profit maximization price for itself and the others to accept it; it is known as aggressive price leadership. It may fix such a low price as some of the firms may resort to exit from the industry.

• (iv) When the pricing is done by the dominant firm suppressing competition among oligopolies firms are known for effective price leadership.

• The real test of the dominant firm's price leadership is the extent to which the other firms follow its lead. The moment the firms cease to follow the price leader, the model of price leadership by the dominant firm seems to break down.

• Besides, if the other firms have different cost curves the same price may not maximize short-run profits for all the firms under oligopolistic situations under the head of price leadership.

The price leadership exercising price leadership:

• 1- The reactions of the firms when the price is announced.

• 2- Elasticity of substitution between the product of the price leadership firm and the competitive firms.

• 3- Knowledge about the policy of competitive firms.

• The price determination by the price leadership firm can be illustrated with the help of the diagram

• In this diagram, MC and MC1 are the marginal cost curves of the two firms A & B and AR and MR are their respective average revenue curve and marginal revenue curve.

• Firm A's marginal cost curve MC and its marginal revenue curve MR intersect each other at E and E is the point of Equilibrium with OQ level of output and QP level of price and similarly, in the case of firm B its equilibrium point is also set at point E1 where its respective marginal cost curve MC1 and Marginal revenue curve MR cut each other at point E1 and OQ1 is the level of output with OQ1 is the level of output with P1Q1, being the price, making a comparison between the two firms firm A's price is lower than the price of firm B but the output is greater than B's firm so, in this way firm A will act as a price leadership firm and will determine the price and output policy for the rest of the firms under an oligopolistic market under the case of price leadership.

• Thus, firm A is the price leadership firm that quotes the price for the rest of the firms and acts as a torchbearer in the field of pricing and output.