Price leadership happens when one company in an oligopoly (a market with very few sellers) sets or changes its prices, and other firms in the industry follow them. This usually happens immediately or shortly after the price change.

The leader is typically the largest or most dominant firm in the market.

There are two main types of price leadership:

• Dominant firm leadership: The biggest company sets the price, and all other competitors follow.
• Barometric leadership: A firm, which might not be the largest, sets a new price because it predicts changes in market conditions. Others follow because they agree that the change reflects the current market reality.

Price leadership helps companies in concentrated markets avoid price wars and keep their profits stable. It is considered an implicit coordination mechanism, meaning firms do not talk to each other to fix prices; they simply understand that following the leader is best for everyone.

If firms make a hidden agreement to follow the leader, it becomes tacit collusion, which may be illegal under competition laws.