Price Maker

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21 Aug, 2024

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Price maker (P-M) refers to a firm having enough market power to control the market prices of its products and services without losing its customers. Due to a lack of substitutes or competition, such a corporation has a monopoly in the market, allowing it to affect the price of goods they sell by altering production.

Price makers enjoy considerable market power due to their differentiated products. As a result, they can charge higher prices regardless of consumers or rivals and make substantial profits. Unlike price makers, price takers have no pricing power and take the prevailing market rates. Typically, monopolies or big established companies with patented products are price makers, while small companies are price takers.

A price maker in economics is a firm with the power to set its price for the products without worrying about competition or consumer loss.
It is best suited to a monopolistic or imperfect market competition.
The market leaders may sometimes act as Price Makers, like Google and Apple.
Price Makers are the opposite of price takers, which are firms that do not have the ability to dictate the market price of their product.

Price Maker Explained

In economics, a price maker is a firm having the power to decide the price of its items without caring about the customers or rivals. It enjoys substantial market power due to it being a monopolist or its products being unique or differentiated. P-Ms are generally found in imperfect markets.

A Price Maker can alter the output of its product at any time to suit its needs for profit maximization. For instance, if a firm wants to increase the price, it will reduce the amount of the product output inducing demand. However, a price maker can regulate supply only when it has a monopoly over the product.

Suppose a company ABC is the market leader of a product with no rivals. Initially, it produced 15 million pieces of its item at $40 per piece. However, in a bid to increase its profits, it exercises its market power and increases the product price to $48 per piece.

Since the company has control over sales, it will reduce its output to 10 million pieces. As a result, it will generate greater profit by operating at a lower volume, but selling at a higher price. In the absence of other alternatives, customers will continue to buy the product at higher prices.

Note that the demand curve of the Price Maker in a monopoly is also the industry's demand curve. It is downward sloping. It means any increase in price of a product will reduce its demand. However, price makers reduce production and costs to sustain profits.

Price makers are particularly widespread in the IT industry. For instance, Google and Apple are price makers in the smartphone sector worldwide through their mobile operating systems such as Android and iOS. With their unique products, they can command premium prices while retaining their market share.

Examples

Let us understand the concept more clearly by using price maker examples below:

Example # 1

Suppose the company Electron Inc. makes an auto day-night switch for the street lamps. It has acquired an exclusive patent for this product and sets the cost per switch at $150.

The company invests only $15 to manufacture a switch, thus generating a 90% profit on every piece sold to the market. Moreover, Electron Inc. can produce only 100,000 switches annually, which is quite less than the high demand for the auto day-night switch in the market. Therefore, it can dictate the market price of the switches due to primarily three reasons:

Absence of any rivals in the manufacturing of auto day-night switches
High demand for the device
High profit margin per device

Thus, Electron Inc. dictates the price of the device in the market. It, therefore, becomes a price maker and can raise the price to either $300 or higher due to the high demand and zero competitors.

Example # 2

Assume Secure Traders Inc. is an affluent brokerage house. It holds shares of many prominent companies. One day it notices that the company XYZ stock price has touched the support level. So, in the hope of selling the XYZ shares at the resistance level soon, it begins buying as many XYZ shares as possible.

As soon as Secure Traders Inc. reaches the point where it becomes the majority shareholder and the securities reach the resistance level, it decides to sell them at the set price. So, in a way, Secure Traders Inc. has become a price maker as it can control the price of XYZ securities.

Example # 3

With coronavirus engulfing the whole planet, pharmaceutical giants Pfizer, BioNTech, and Moderna embarked on the path of vaccine production to reign in the pandemic. Their successful production of COVID-19 vaccines made them market leaders.

Since these companies have patents over their vaccines, they possess great market power and can decide the price of their vaccines. Thus, they emerged as price makers in the global vaccine market.

A reliefweb article reveals the extent of the power they exert in the vaccine sector. As per the report, Pfizer, BioNTech, and Moderna make a profit of $65,000 every minute. Moreover, these price makers use their market power to enter into profitable contracts with rich nations to further their interests with disregard for low-income countries.

Example # 4

Google, with its mobile operating system Android, has created an ecosystem of smartphone applications hosted on its Play Store. Thus, it commands licensing fees from mobile-making companies. Hence, it can increase charges without hindrance from customers, mobile makers, or even rivals.

Similarly, Apple, with its iPhone, has a dominant position in the smartphone market in the US and other developed nations. It increases its price without concern for customers or competitors by reducing the output.

As evident, market leaders with unique patented products and software like Apple and Google can be price makers in the market.

Price Maker vs Price Taker

Both price maker and taker are opposite of each other, depending on the nature of the market. However, there are many differences between them:

Price maker is prevalent in an imperfect market competition like monopoly, whereas price taker is active in a perfectly competitive market.
P-M can set the price of its product and services as per its discretion. Price takers cannot put their price but accept the market's current price.
P-Ms are market leaders with unique products. But it is not the case with the price taker.
Price Maker decides the industry's demand curve, whereas the industry determines the demand curve of the price taker.
Google (Android) and Apple (iOS) are the closest P-Ms in the mobile sector, whereas all other smaller mobile-making companies are price takers.

Frequently Asked Questions (FAQs)

What is a price maker?

A price maker is a firm that has the power to set the price of its products on its terms irrespective of customers or rivals. It earns substantial profits by increasing the product price. The P-M only exists in an imperfectly competitive market like a monopoly. Android and iOS are examples that have allowed Google and Apple to dictate prices in the mobile sector.

What is the difference between price maker and price taker?

A price taker is the opposite of PM. The latter decides the price for its products, whereas the former accept the price determined by the market. Price taker exists in a perfect market competition like an open market, but the PM survives in an imperfect market like an oligopoly or monopoly.

Does a price maker exist in a monopoly?

A monopoly is a type of imperfect market where there are no competitors and products have no close substitutes. Therefore, the firm offering the products can charge any price without considering customers or rivals. Thus, such a monopolist firm is a price maker.