Price-Taker

From CEOpedia | Management online

Price taker may be individual person or a company that has to accept current prices on the market, without having a market share to influence the market price on its own. To make it clearer - price taker simply does not have possibility to control product price which it sells (sellers have to accept the market price in order to sell their products). If subject has price taker specification it will not make any pricing decision.

Price taker market

In a price taker market, individuals or companies sells the same products (i. e. eggs, wheat). In order to this fact the output of any firm has no effect on the price in the market. Based on that price taker market is perfectly competitive. However, in the real world, a lot of firms are not price takers. They have abilitiy to change their prices, without losing many customers. Such subjcets are called price searchers. In the other hand if most of the companies in real world are price searchers why analyzing price taker market is so significant. There are three core reasons:

  • there are some important markets, where firms take the market price (i. e. agriculture),
  • price taker model clarifies the connection between the decision making of individual units and the market supply,
  • examining the markets on which companies are price takers, increases our knowledge about competition as a dynamic process, also including other markets.

Characteristics of price taker market

Price taker market has very specific characteristic:

  • all market participants produces the same product,
  • there are many sellers and buyers on the market,
  • each of the companies provides only a small part of the market demand,
  • companies in the market has no entry or exit limits.

Maximizing profit as a price taker

As everyone knows if company want to exist and develop it has to earn money. So the output decision of any company is based on increasing profit, which requires collating income with cost. However the price taker Has a different situation, because it has to sell all the products at the same price. In the opinion of "Microeconomics: Private and Public Choice" authors "To Maximize profits, in the short run, the price taker will expand its output until marginal cost Just equals marginal revenue (price)." (James Gwartney, Richard Stroup, Russel Sobel, David Macpherson; 2005; p. 177). To better understand that words we have to know the definition of marginal revenue - the marginal revenue is a change in the total revenue of the company per unit of production. This is the additional income obtained from the sale of an additional product. Because of that fact price - taker who sells all the products for the same amount of money, its marginal revenue will always be the same as the market price. This means that the production and sale of one more production unit increases the companys income by exactly the same amount as the current market price. The model of price taker underlines the importance of a competitive process. Competition puts the press to producers so that they operate efficiently and wisely use resources. Maintaining consistent quality, reducing costs means more profit. Therefore, increasing profit will convince every company to minimize production costs - to use a set of resources least valued in other applications to produce the final product. Companies that do not maintain low costs will be forced out of the market.

The model of price taker also emphasizes the role of profits and losses in managing the activities of entrepreneurs and resource providers in the economy. As the demand for a product increases, higher economic gains causing entry of the new companies to meet this increased demand. Additional resources influence the production of higher value goods and other industries. In contrast to the drop in consumer demand for a product, economic losses cause companies to abandon operations and reallocate resources towards other industries in which they are now more valuable. It is a mechanism of profit and loss, powered by consumption demand and production costs, which control the allocation of resources in an economy market.

Examples of Price-Taker

  • Small Businesses: Small businesses, such as local shops and restaurants, are often price takers. They do not have the market power to set their own prices, so they must accept the prices set by the market.
  • Farmers: Farmers are also often considered price takers, as their products are largely dictated by the market. They are also highly dependent on factors such as weather, which can affect the supply and demand of their crops.
  • Commodity Retailers: Commodity retailers, such as those selling oil and gas, are often price takers as well. They are highly dependent on the global markets and must accept the prices set by the market.
  • Individuals: Individuals, such as consumers, are also price takers, as they typically do not have the bargaining power to influence prices. They must accept the prices set by the market.

Advantages of Price-Taker

Being a price-taker has some advantages. These include:

  • A price-taker has the flexibility to sell in a competitive market and does not need to worry about setting their own prices. This allows the price-taker to focus on producing and delivering quality products and services to their customers.
  • As a price-taker, the company can react quickly to changes in the market and adjust their prices accordingly. This helps the company to remain competitive and ensure they are not pricing themselves out of the market.
  • A price-taker can also benefit from economies of scale. By purchasing in bulk, they can often get lower prices than if they were setting their own prices. This can help the company save money and increase their profit margins.
  • Lastly, being a price-taker can also help the company focus on expanding their customer base rather than competing on price. This will help them to build relationships and grow their market share.

Limitations of Price-Taker

Price-takers face a variety of limitations due to their lack of influence on the pricing of a product. These limitations include:

  • Lack of pricing power - Price-takers cannot set their own prices, as they must accept the market price, meaning they cannot compete with larger firms who may have greater pricing power.
  • Lack of bargaining power - Price-takers are unable to negotiate for better prices, as they are not in a position to influence the market.
  • Lack of product differentiation - Price-takers cannot differentiate their product from those offered by competitors, as they are unable to set different prices.
  • Lack of price elasticity - Price-takers cannot increase or decrease prices in response to market conditions, as they are not in a position to influence the market.
  • Lack of competitive advantage - Price-takers are unable to gain a competitive advantage over competitors, as they are unable to set prices or differentiate their product.

Other approaches related to Price-Taker

In terms of pricing strategies, there are other approaches aside from being a price taker. These include:

  • Price Skimming - This strategy involves setting a high price for a product when it is first released and then gradually lowering the price as the demand decreases. This type of pricing is often used to maximize profits in the short term.
  • Penetration Pricing - This strategy involves setting a low price for a product in order to gain market share. This type of pricing is often used to increase sales volume quickly and to compete with existing competitors.
  • Price Discrimination - This strategy involves setting different prices for different customers based on the customer's willingness to pay. This type of pricing is often used to maximize profits by charging different prices to different customers.
  • Bundle Pricing - This strategy involves offering a group of products at a discounted price. This type of pricing is often used to increase sales volume by offering customers a better deal than they would get if they purchased the items separately.

In summary, there are a variety of pricing strategies that can be used in lieu of price taking. Each strategy has its own advantages and disadvantages, so it is important to consider all of the options before deciding which one is best for a particular situation.


Price-Taker — recommended articles
Price Maker — Factors affecting pricing — Market structure — Price taker — Free competition — Production concept — Pricing strategy — Monopson — Substitute goods

References

Author: Paweł Łącki

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