Price Takers

A price-taker is an individual or firm with no control over the prices of goods or services sold since they usually have small transaction sizes and trade at prevailing prices in the market.

• A price taker refers to an individual or firm with no control over the prices of the goods or services they sell. 
• Capital market institutions, such as stock exchanges, are designed to facilitate trading among participants. As a result, most participants in these markets are price takers, meaning that supply and demand changes have a significant impact on security prices.
• In a perfectly competitive market, all participants are price takers. This is because many sellers offer identical products, no barriers to entry or exit, perfect information, and no market power to influence prices.

Some examples of a price taker are given below: –

Example #1

Let us look at the air travel industry. Multiple airlines provide flight services from one destination to the other. The basic fare for all these airlines would be almost identical. The difference could come in additional services like meals, priority check-in, etc. Suppose one airline charges a much higher amount than its peers for the same category of products; people will buy tickets from the lower-priced airline.

Example #2

Another example can be a financial services company. These companies charge a certain price for providing services to their clients. Now, these clients know the amount charged by different companies to avoid any company setting higher than the others. The prices may vary for special services that add to the basic ones, but similar services would remain at the same level as their competitors.

Capital market institutions such as stock exchanges are design-made so that most participants are price takers. That is because demand and supply heavily influence the price of securities. Still, there are large participants such as institutional investors who can change this demand and supply, affecting the costs of the securities. They are known as price makers. Besides these participants, most people who trade daily are price takers.

Therefore, we can take a stock exchange as a general example of a market where most participants are price takers.

• Individual Investors: Individual investors trade in minimal quantities. Their transactions have no one to negligible impact on the prices of the securities. They take prevailing prices in the market and trade on those prices.
• Small Firms: Small firms are also price takers because their transactions cannot influence market prices. Granted, they have relatively more power and influence in the market than individual investors. However, it is still not enough to shift them into the price-makers category as they can still not influence the demand or supply of the securities.

All firms in a perfectly competitive market are price takers for the following reasons:

• A Large Number of Sellers – Many buyers for any product are large in a competitive market. They sell identical products. Hence, a single seller cannot influence the price of the products. If any seller tries to do that, they risk significant losses because no buyer would buy from a seller who prices his products higher than the others.
• Homogenous Goods – The goods are identical in a perfectly competitive market. There is no inclination for a buyer to buy from one specific seller. Of course, a seller can have pricing power if the product is differentiated. But in this case, everybody sells the same product, so the buyers can go to any seller and purchase it.
• No Barriers – There are no barriers to entry and exit in a perfectly competitive market. Firms can enter and exit whenever they want to. Hence, they have no pricing power and become price takers.
• Information Flow – A seamless flow of information in a perfectly competitive market. Buyers are aware of the prices of goods that exist in the market. Therefore, if a buyer tries to charge higher than the prevailing price in the market, the buyers find out and cannot buy from the seller trying to sell at a higher price than the others. So, the buyer has to accept the prevailing price in the market.
• Profit Maximisation – Sellers try to sell the goods at a level where they can maximize their profit. Usually, the marginal cost of producing the goods equals the marginal revenue from selling the product. The marginal revenue is also the average revenue, or the price because all the units of that product are sold at the same price.

As opposed to perfect competition, one or two firms in the market have a monopoly over the products in a monopolistic economy. Those firms have immense pricing power and can do whatever they want to. Therefore, the rest of the firms become price takers automatically. Let us take an example:

In the soft drinks market, Coca-Cola and Pepsi lead the market. Therefore, they set the prices for their products and enjoy heavy market shares. Now, suppose another company exists in the market. That company cannot set the price of its products higher than these two because, in that case, the buyers would go to the trusted brands that already enjoy a huge market share. Therefore, this company would have to take the price set by Coke and Pepsi to stay in the market. Otherwise, it will incur a huge loss of business and revenue.

Entities that cannot influence the price of goods or services are forced to become price takers. It happens for many reasons, like many sellers, homogenous goods, etc. In a perfectly competitive market, all firms are price takers. And, in monopolistic competition, most firms are price takers.

Firms will sell the products in a perfectly competitive market as long as marginal revenue equals the marginal cost. If the marginal revenue falls below the marginal cost, that will shut the firm down.

This article is a guide to the Price Taker definition. We discuss a price taker firm in perfect and monopolistic competition and price taker examples. You can also learn more from the following articles: -

• Monopoly vs Oligopoly
• Examples of Monopoly
• Formula of Price Elasticity of Supply
• Examples of Oligopoly