Several reasons are why this might be. Price takers must accept the market price as their selling price. As a result, each company cannot maximize its profit by increasing or decreasing the price charged. Conversely, price-makers have the market power to influence prices.
They can set prices above the perfectly competitive equilibrium price by influencing market supply or differentiating their offering. Such power applies to firms in the imperfect competition markets. In a monopolistic competitive market, firms are price searchers.
The market consists of many players. The entry and exit barriers are also low. However, they have some market power through differentiation, enabling them to set prices above competitive prices. Furthermore, under oligopoly competition , firms have relatively high market power.
The market is composed of few players, and barriers to entry are also relatively high. Several players dominate the market, enabling them to influence market supply and prices. Also, companies can take a differentiation strategy to set prices above competitive market prices. Thus, companies in this market tend to be price makers.
In case an organisation charges a higher price, the customer will shift to the next low-cost seller in view of identical goods sold by the low-cost seller. An example of a market for identical goods is the foodgrain market. The prices are determined by an interaction of demand and supply in the domestic and international markets.
The low-cost producers will generally have a competitive edge, and they can increase their market share from the high-cost producers. Also, technology gives an edge to certain producers in terms of efficiency and low costs. In such cases, the other producers have to be price takers. Price-taking behaviour would be different for different commodities. In the case of crude oil, there are few oil-producing firms controlling the production of oil. The buyers of petroleum products and gasoline are mostly price-takers.
Also, the nature of the industry or the market also determines whether the organisation or firms are price takers. In the case of processed foods sold in a retail supermarket, the customers are price takers in view of fixed retail prices. However, the converse holds good in online-auction sites where potential customers can bid, and sellers become price-takers. The situation may not be uniform across all market categories with the exception of stock markets where certain individuals or organisations are market makers, and the others are price takers.
Being a market maker, however, does not mean that they can set any price they want. Market makers are in competition with one another and are constrained by the economic laws of the markets like supply and demand. We're all price-takers. When we go the grocery store, we can decide if we want to buy some item with some price tag, but we do not haggle or enter a lower bid for your milk, eggs, or meat.
In most competitive markets, firms are price-takers. If firms charge higher than prevailing market prices for their products, consumers will simply purchase from a different lower-cost seller to the extent that these firms all sell identical substitutable goods or services. Grain markets such as for wheat are a prime example of a good that is almost identical in quality between its many sellers, so the price of grain is determined by competitive activity in domestic and global markets and commodities exchanges.
In the case of wheat, low-cost producers will have a competitive advantage in that they will be able to drive out high-cost producers and take their market share by offering progressively lower prices. Technological innovation that lowers the cost of production is part of the process of competition whereby capitalist firms have no choice but to be price takers.
The market for oil is slightly different. While oil is competitively produced as a standardized commodity on a global market, it has steep barriers to entry as a seller, due to the high capital costs and expertise needed to drill or refine oil, as well as the high bidding price of oil fields. As a result, there are relatively few oil-producing firms compared to wheat farmers, and so most consumers of gasoline and other petroleum-products are the price-takers—they have few producers to choose from outside a handful of global companies.
This underscores how a consumer is price-taking to the extent that he can't or doesn't want to produce the good on his own. Nevertheless, due to intense competition and technological innovation among these firms, consumers still get oil at low prices. The nature of an industry or market greatly dictates whether firms and individuals are price-takers.
For example, most consumers in retail markets are, indeed, price-takers. For instance, you walk into a clothing store or supermarket and decide what to buy or not, but you are beholden to the price tag attached to a product.
You cannot go to your supermarket and competitively bid for a dozen eggs or a box of cereal, you must take the price being offered, or leave it. Online auction sites such as eBay, for example, allow consumers to bid and so the sellers become the price-takers. A perfectly competitive market is rare. In most markets, each firm or individual has a varying ability to influence prices, either through sales or purchases. The polar opposites of perfectly competitive markets are monopolies and monopsonies.
A monopoly is a market in which a single seller or a group of sellers controls an overwhelming share of supply, giving the seller or sellers the power to drive up prices on their own. OPEC has a monopoly to a degree. A monopsony is a market in which a single buyer or a group of buyers has a significant-enough share of demand to drive prices down.
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