In price leadership, what is the typical behavior of competing firms?

In price leadership, the typical behavior of competing firms is characterized by one firm taking the initiative to set its price first, followed by others adjusting their prices in response. This model often emerges in oligopolistic markets where a dominant firm, known as the price leader, sets a price that other firms can follow to maintain their market presence without engaging in aggressive competition.

The price leader's established price provides a benchmark for the rest of the industry, allowing competing firms to remain competitive while avoiding the potential pitfalls of a price war, which can lead to reduced profits for all involved. This cooperative behavior helps stabilize the market and aligns firms with the price set by the leader, fostering a more predictable pricing environment.

In contrast, firms that independently set their prices would not participate in the price leadership dynamic, as this approach typically leads to variance in pricing and can create uncertainty in the market. Furthermore, setting prices before a market leader would imply that individual firms are not following the leader, undermining the principle of price leadership. Lastly, engaging in a price war would directly contradict the objective of pursuing price leadership since a price war typically leads to price cuts that harm both leaders and followers, disrupting the intended market stability.