Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

 
2.2.3. Barometric Price-Leadership: 
 
In this model, that firm is chosen as leader which is 
supposed a have a better knowledge of market conditions as well 
as a better ability to forecast future market developments. All other 
firms agree, formally or informally, to follow its price changes. In 
other words, the firm chosen as leader is regarded as a barometer 
reflecting the changes in economic conditions. The barometric firm 
may neither be a low cost nor a very large firm. Generally, it is a 
firm which, on the basis of its past performance, has established 
the reputation of a good forecaster of economic changes. A firm 
belonging to pother industry may be chosen as the barometric 
leader. For example, a firm in the steel industry may be accepted 
as barometric leader for price changes in the motor car industry. 
There are various reasons for establishing barometric price 
leadership. 
Firstly, rivalry among several large firms in an industry may 
make it impossible to accept any one of them as leader. 
Secondly, followers do not have to continuously recalculate 
costs as economic condition change. They simply follow the 
barometric leader. 

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Thirdly, the barometric firm has the reputation of a good 
forecaster of changes in cost and demand conditions in a 
particular industry and the economy as a whole. By following other 
firms can be reasonably sure that they have chosen the correct 
price policy 
Leadership in oligopoly markets is common in modern 
countries. When formal collusion agreements are declared illegal, 
oligopolists enter into tacit, informal, and secret agreement under 
which all firms follow the price-lead of one firm and yet escape the 
anti-trust, anti-cartel laws. Besides, there are gentlemen's 
agreements regarding price, output are market- sharing, etc. 
reached on social occasions.