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The price-leadership model of oligopoly assumes that there is one dominant firm in the industry that sets the price and then all the other firms in the industry behave like perfectly competitive price-taking firms. Once all the other small firms have chosen their desired quantity, the price leader will produce to meet the remaining demand at that price. As the name implies, the price leadership model consists of a leader and a bunch of followers. The leader, however, is always mindful of the demand and will set prices low enough that a satisfactory demand remains after all the followers have made production decisions. This model implies that the dominant firm is better off with larger amounts of the market share and less competition. As a result, the price leader may choose prices to minimize the participation of smaller firms. This pricing strategy is called predatory pricing. As in the other oligopoly models, an oligopoly with a dominant price leader will produce a level of output between the output that would prevail under competition and the level that a monopolist would choose in the same industry. It will also set a price between the monopoly price and the competitive price.
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