price leadership

Price leadership is common in oligopolies, such as the airline industry, whereby a price leader sets the price and all the other competitors feel compelled to lower their prices to match. The trick, however, is that a fine line exists between collusion (which is illegal), predatory pricing (also illegal) and price leadership -- especially if the price changes are not related to changes in operating costs.

Clearly, price leadership is usually a challenge for companies that aren't price leaders, because they are in the position of either defending their higher prices or, at a minimum, reacting to the strategies of another company. In many cases, smaller competitors do not have the same economies of scale as the price leaders and thus can't survive constant price declines.