What is a price taker?
A price taker is an individual or a company that must accept the prices prevailing in a market, not having the market share to influence the market price by itself. All economic participants are considered as price takers in a market where competition is perfect or in which all companies sell an identical product, there are no barriers to entry or exit, each company has relatively small market share and all buyers have market information. This applies to producers and consumers of goods and services as well as to buyers and sellers in the debt and equity markets.
On the stock market, individual investors are considered price takers, while market makers are those who fix the supply and supply in a security. Being a market maker, however, does not mean that they can set the price they want. Market makers compete with each other and are constrained by the economic laws of the markets such as supply and demand.
We are all price takers. When we go to the grocery store, we can decide if we want to buy an item with a certain price, but we don’t negotiate or bid a lower offer for your milk, eggs or meat.
Understanding price takers
In most competitive markets, companies are price takers. If companies charge higher prices than the prevailing market prices for their products, consumers will simply buy from another seller at a lower cost since these companies all sell identical (substitutable) goods or services.
The grain markets, like the wheat market, are a great example of a good of almost identical quality among its many sellers, so the price of grain is determined by competitive activity on national and world markets and exchanges. of products.
In the case of wheat, low-cost producers will have a competitive advantage in that they can chase high-cost producers and gain market share by offering progressively lower prices. Technological innovation that lowers the cost of production is part of the competitive process by which capitalist enterprises have no choice but to be price takers.
The oil market is slightly different. Although petroleum is competitively produced as a standardized product in a global market, it presents strong barriers to entry as a seller, due to the high investment costs and the expertise required to drill or refine oil, as well as the high bid price of the oil fields.
As a result, there are relatively few oil producing companies compared to wheat producers, and therefore most consumers of gasoline and other petroleum products are price takers – they have few producers to choose from. a handful of global companies. The Organization of the Petroleum Exporting Countries (OPEC) also has great power to push prices up and down through production controls. This shows how a consumer takes prices to the extent that he cannot or does not want to produce the good himself.
However, due to intense competition and technological innovation between these companies, consumers are still getting cheap oil.
The nature of an industry or market greatly dictates whether companies and individuals are price takers. For example, most consumers in the retail markets are indeed price takers. For example, you walk into a clothing store or supermarket and decide what to buy or not, but you are responsible for the price attached to a product. You can’t go to your supermarket and make a competitive offer for a dozen eggs or a box of cereal, you have to take the price offered or leave it. Online auction sites such as eBay, for example, allow consumers to bid and therefore sellers become price takers.
Key points to remember
- A price taker is an individual or a company that must accept the prices prevailing in a market, not having the market share to influence the market price by itself.
- Due to market competition, most producers are also price takers. It is only under monopoly or monopsony conditions that we find prices.
- Market makers set prices for financial products such as stocks. But market markers are also competing to trade.
Special considerations: different types of contracts
A perfectly competitive market is rare. In most markets, each company or individual has a varying ability to influence prices, whether 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 group of sellers controls an overwhelming share of the supply, which gives the seller or sellers the power to raise prices by themselves. OPEC has a monopoly to some extent. A monopsony is a market in which a single buyer or group of buyers has a large enough share of demand to drive prices down.