Price Maker

From CEOpedia | Management online

A price maker (also called price leader) is an entity that has the ability to influence the price. A price leader is a product that can dictate the price in its market (due to perceived value) (J. Clark, p. 219).

The price maker plays an active role in the market and takes the initiative in most economic decisions. Its behavior on the market has many more aspects than to the price taker's. The price maker is not able to determine the volume of sales. So he has to allow price takers to set the price. The price maker must be timely and properly coordinate his market behavior (T. Scitovsky, p. 245, 247).

Many small businesses are price makers to some extent. this is the case where buyers have difficulty in clearly distinguishing between prices offered by different suppliers (P. Atrill, E. McLaney, p. 156).

Types of price makers

Price makers can be divided into two groups:

  • those who, when setting or changing prices, must consider the likely counteract of competitors;
  • those who may ignore such considerations.

To distinguish between them we can refer the first as a dependent price maker, and second as an independent (G. Means, W. Samuels, F. Lee, L. Lee, p. 60).

Price Discrimination

A price maker is not obliged to charge the same price to all consumers and may benefit from charging different prices for the same product.

Price discrimination occurs when a monopolist charges consumers different prices to consumers for the same product for reasons unrelated to production costs.

Types of price discrimination:

  • first-degree price discrimination (firm exactly know how much the consumer is willing to pay - an unlikely occurrence);
  • second-degree price discrimination (firm sell surpluses at lower prices than previously charged);
  • third-degree price discrimination (firm can increase total revenue and profit by charging different prices for the same product in different market segments) (R. Young, p.43).

Examples of Price Maker

  • Government: Governments, such as the US Federal Reserve, have the power to set and influence the prices of commodities such as oil, gold, and currency.
  • Large Companies: Large companies, such as Amazon, have the power to set prices in their respective industries.
  • Monopolies: Monopolies, such as Microsoft, have the power to control the prices of their products.
  • Supply and Demand: Prices of goods and services can be affected by the supply and demand of a particular product or service. If there is high demand for a good or service, prices may be higher than if there is low demand.
  • Market Conditions: Prices of goods and services can be influenced by the overall market conditions. For example, if there is a recession, companies may lower prices in order to attract customers.

Advantages of Price Maker

Price makers have several advantages:

  • Price makers can set their own prices, allowing them to maximize profits and gain a competitive edge in the market. This can be particularly beneficial in markets where there are few competitors, since the price leader can set a price that is difficult for others to match.
  • Price makers can also exercise control over their supply chain and distribution, which can lead to higher margins. By controlling where their products are sold and how they are marketed, they can make sure that their products are seen by the right consumers.
  • Price makers can also benefit from economies of scale. By setting their own prices, they can purchase materials and components at a lower cost than competitors. They can also use their market power to negotiate better deals with suppliers.
  • Price makers can also use their market power to influence the behavior of other market participants. By dictating prices, they can influence the prices of other market participants and influence the behavior of their competitors.

Limitations of Price Maker

Price makers are limited in their ability to influence the market. Some of these limitations include:

  • Lack of market control - Price makers do not have the ability to control the market, and therefore, they are unable to ensure that their prices will be accepted by buyers.
  • Limited influence - Price makers often lack the influence to set prices that are accepted by all buyers in a market.
  • Risk of overcharging - Price makers run the risk of overcharging buyers if they set prices too high.
  • Cost of change - Price makers must bear the cost of changing the prices if they are not accepted by buyers.
  • Difficulty in setting prices - Determining an appropriate price for a product or service can be difficult, as it is difficult to predict how buyers will respond to the price.
  • Competition - Price makers may face competition from other sellers who are willing to offer lower prices.

Other approaches related to Price Maker

Price Maker is an entity that has the ability to influence the price. Other approaches related to Price Maker include:

  • Price Discrimination - Price discrimination is the practice of charging different prices for the same product or service. It involves charging different prices to different consumers for the same item, depending on the consumer’s ability to pay.
  • Price Skimming - Price skimming is a pricing strategy in which a company charges the highest initial price for a product. This high price is meant to attract only the most affluent consumers and generate maximum profits for the company.
  • Price Elasticity - Price elasticity is the measure of how sensitive a market is to changes in price. It is expressed as a ratio that shows the percentage change in quantity demanded divided by the percentage change in price.
  • Price Discrimination - Price discrimination is the practice of charging different prices for the same product or service based on different factors, such as geography, demographics, or customer loyalty.

In conclusion, Price Maker is a concept related to the ability of an entity to influence the price, and other related approaches involve price discrimination, price skimming, price elasticity, and price discrimination. These approaches are all designed to help companies maximize their profits by charging different prices to different segments of the market.


Price Maker — recommended articles
Price-Taker — Factors affecting pricing — Market structure — Price taker — Flexible pricing — Administered price — Discriminatory pricing — Price sensitivity — Monopoly

References

Author: Katarzyna Sieczkowska

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