A business may become a price taker vs price maker. Normally if the product is not unique, the producer automatically recedes itself to being a price taker instead of a price maker. Price taker vs price maker are both opposite terms which define a market.
A price-taker-influenced market is the one in which the prevalent market prices are taken to sell the items. Price takers are usually found in perfect competitive markets.
A price-maker-influenced market is the one which is influenced by the key elements who have the power to enforce the market price. Price makers are found in imperfect competitive markets which are more commonly known as monopolistic or oligopolistic markets.
- Price taker
In economics, the term price taker is referred to a market participant that is unable to devise the pricing policy in a market. Therefore, a price taker accepts the prevalent market price readily. Price takers usually have insufficient power to influence the prices of goods or services.
- Price maker
Price maker is that market participant which enjoys monopoly in the market. In economics, it means that the price maker has the power to influence the prices of services and products floated in the market. A price maker produces goods or services which can be differentiated from its competitors’ products in the same category.
One of the most famous examples of a price maker firm is Apple. It is a company which has control over its prices, but because of its products being unique, it has become a market leader – eventually keeping the prices as high as it wants – regardless of the competition.
Usually a price maker rules the market when there is little or no competition in the market.
Price takers are usually found in a perfect competitive market
Price takers usually work comfortably in a perfectly competitive market. They can easily gel in and do business in such environment, reasons being:
- All the companies deal in similar products or services
- The market comprises a large number of buyers and sellers
- Absolutely no entry or exit barriers in the market
- Buyers can easily check the information of other companies also
An example of a perfectly competitive market is the agricultural market. The companies operating in the agricultural sector are price takers, because:
- There is a large number of sellers and buyers in the market, that’s why none of them can influence the market individually. If someone tries to do so, the risk of losing a significant revenue is so great. Therefore, no one even tries to exploit the power to control the price of the products
- All the products bought and sold in the market are identical. There is literally no brand loyalty
- It is not difficult to enter the market. The production may cause some barrier for the entry, but it is not difficult at all. The market offers an open place for everyone to come and conduct business according to the rules already prevalent in the market.
- A perfectly competitive market gives immense power to the buyer in terms of checking the information provided by the seller. Buyers can easily access the price information; thus, they opt for buying products at the lowest prices
Theoretically, a perfectly competitive market sounds ideal to work in, but in real life, it is next to impossible to find it. Every market has a price maker involved in it. A large section of products instills some degree of differentiation. This differentiation among the products is mandatory and it is bound to exist.
It is highly unlikely to experience a perfectly competitive market in today’s economy. There are so many additional factors involved in determining the prices of products and services that it just can’t remain perfect. The competition becomes fierce and cut-throat even for simple product like bottled-water.
The bottled-water producers may differ in their brand identity, their production and purification methods etc. Also they might face high start-up costs in different markets due to already existing product monopolists in the market. One of the producers may face stricter government regulations which may result in limiting the options to enter and exit a market.
The closest example of a perfectly competitive market is an agricultural market as stated above which can be used to study the behavior of price taker vs price maker market.