Implied threat strategy by a low-cost price leader
A low-cost price leader will set alternative pricings in which goods can be obtained in a cheaper means and can also maintain the low cost in order to compete in the market. For this to be enhanced in the industry, the strategy has to be very rare and also costly to maintain. This will keep the leader always different from the competitors. In this case, the leader should have been dominating the industry for a reasonable period such that the competitors find the sense of it setting the prices following an assumption that this leader has a clear picture of the Industry.
A firm becomes a low-cost price leader through its size and its volume of production maintaining the lower cost of production. This is a disadvantage to the follower since it has to forego some of its profits in order to avoid price wars which may occur when the leader lowers its prices in order to eliminate its competitors from the market. Also the bigger the size of the firm the higher the economies of scale hence it becomes more expensive for a firm to enter into the market hence the firm remains powerful. Also, the bargaining power of the larger firm is more compared to a small sized firm hence this is a strategy towards lowering cost.
An oligopolistic firm can adapt this strategy since this is a market structure where there are a few firms in an industry which control the production of a specific good (Green, Marshall, and Marx, 2014). Its competitiveness will depend on how the rivalries act. The firms in this market structure adopt almost similar pricing making it experience minimum price wars, therefore, its competition arise from how they do their promotions and advertising.
Green, E. J., Marshall, R. C., & Marx, L. M. (2014). Tacit collusion in oligopoly. The
Oxford Handbook of International Antitrust Economics, 2, 464-497.