Price MakerExplained & Defined with Examples
What is a Price Maker?
The companies that have the power to set their own product’s price are called Price Maker.
These companies do not have any competitors and are the sole producer of unique products that do not have perfect substitutes.
These companies belong to a monopolistic market structure.
Price Maker is considered a profit maximizer because of its relative contribution to generating additional profit.
Understanding the Price Maker
Price Maker’s product setting method is different from a free market system.
In a monopolistic market structure, the company may set the prices of its products based on management judgment with consideration of all the costs incurred in producing the product.
Unlike in a free market system, the prices of products depend on the supply and demand curve until they reach market equilibrium.
In a monopoly, a company has no other market competitors. It is the sole producer of a specific product in the entire market.
This situation allows the company to set its prices even higher which puts consumers at a disadvantage because they cannot find any other alternatives for the said product.
Types of Price Makers
There are different monopolistic market structures:
- Multiplant monopoly. The company has built many production plants suited for every production stage of only a single product. Each plant incurs costs relating to the production and records output levels for each plant.
- Bilateral monopoly. This market structure consists only of one seller and one buyer. The disadvantage is on the buying party’s side due to a high selling price imposed by the seller. Both parties may negotiate until they both benefit from the sale transaction.
- Multiproduct monopoly. This market structure has two or more products. As the company may still have the power to set its product prices, it must still consider the possible negative impact of a product’s price on the other products.
- Discriminating monopoly. A company imposes different prices for the same product on consumers depending on their ability to pay, and has three discrimination levels:
- First Level (Perfect Discrimination) – the product price is set at the highest level to which the consumer willingly pays.
- Second Level (Non-linear Price Fixing) – the product pricing will depend on the total amount purchased by the buyer.
- Third Level (Market Segmentation) – the company categorizes consumers according to different types. For example, a lower product price or a student discount is given to students.
- A natural monopoly. A company uses only one production plant at which the whole production stages are done. It is a cost-efficient and cost-effective method for it reduces production costs in the long term.
Regulatory Bodies and Antitrust Laws
The regulating bodies that promote, execute free trade, and protect the consumer from unfair pricing are the Government agencies such as the Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ).
These regulating bodies ensure that companies meet the guidelines set for mergers to avoid monopoly in the market which will result in unfair market competition.
The gauge of the regulating bodies when companies apply for a merger is the Herfindahl-Hirschman Index.
What is the difference between a price maker and a price taker?
Price Maker is a company that has pricing power over its product. Also, it can only be the sole product producer in the market.
In contrast, price takers are companies whose price setting depends on the current free market structure.
They need to follow the current prices in the market, which is vital if they want to run their business long enough until it secures a position in the market.
Such companies don’t have the sole power to set the price of their product.
How can a company become a price maker?
A company can only be a price maker if it is in a monopolistic market structure, which means it is only the sole producer of one or more products in the entire market.
The pricing method is not based on supply or demand. The sole producer alone can set the price of its product as high as the consumer is willing to pay.
Do regulators condone price making?
Companies can set prices as much as they want.
However, if it violates antitrust laws in its pricing strategies, the regulating bodies may intervene and act accordingly.
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Harvard Business Review "Commodity Busters: Be a Price Maker, Not a Price Taker" Page 1 . October 11, 2022