Question

How would a low-cost price leader enforce its leadership through implied threats to a rival? How does a firm become a “low cost” price leader? Discuss the specific type of market structure that implied threat strategy can be adapted.

Answer 1

A low cost price leader would enforce the leadership by offering deals or lowering the price equal to the price of the higher-cost rivals. It will decline the chance that rivals would imitate the low-cost. Companies usually apply this strategy as a means to increase in sales volume and market share for the goods and or services. Moreover the willingness to match lower prices may discourage competitors and potential entrants in the market. It is usually a common practice among main retail stores. For example: Large retailers like Walmart are categorised as low-cost price leaders because these purchase their merchandise in bulk quantities at high discounts and sell them slightly below the rival prices, all while maintaining gross profit margin of a 24%-25%. Other smaller retailers are unable to buy it at high discounts thus have to sell at higher prices to maintain a decent profit margin which will lead people to mainly purchasing from the low cost price leader. We can classify it as oligopoly. An oligopoly a market structure in which the number of sellers is less; and action of one directly affects the competitor such as Cellular Phone Services, Cable Television, Computer & Software Industry