Price Maker

What is a 'Price Maker'

A price maker is a monopoly or a firm within monopolistic competition that has the power to influence the price it charges as the good it produces does not have perfect substitutes. A price maker that is a firm within monopolistic competition produces goods that are differentiated in some way from its competitors' products. This kind of price maker is also a profit-maximizer as it will increase output only as long as its marginal revenue is greater than its marginal cost, so in other words, as long as it's producing a profit.

BREAKING DOWN 'Price Maker'

In a free enterprise system, prices are greatly determined by supply and demand. Buyers and sellers exert influence over prices, resulting in a state of equilibrium. However, in a monopolistic environment, one company has absolute control over the supply released into the market, allowing that business to dictate prices. Without competition, the seller may keep prices artificially high without concern for price competition from another provider. The scenario is typically unfavorable for consumers, as they have no way to seek alternatives that may lower prices.

Types of Price Makers

In a multiplant monopoly, firms with many production plants and different marginal cost functions choose the individual output level for each plant.

In a bilateral monopoly, there is a single buyer, or monopsony, and a single seller. The outcome of a bilateral monopoly depends on which party has greater negotiation power: one party may have all the power; both may find an intermediate solution; or they may form a vertical integration.

In a multiproduct monopoly, rather than selling one product, the monopoly sells several. The company must take into account how changes in the price of one of its products affects the rest of its products.

In a discriminating monopoly, firms may want to charge different prices to different consumers, depending on their willingness to pay. The level of discrimination has various degrees. In the first degree, or perfect discrimination, the monopolist sets the highest price each consumer is willing to pay. In the second degree, or nonlinear price fixing, the price depends on the amount bought by the consumer. In the third degree, or market segmentation, there are several differentiated consumer groups where the firm applies different prices, such as student discounts.

In a natural monopoly, because of cost-technological factors, it is more efficient having one firm dealing with all the production because long-term costs are lower. This is known as subadditivity.

Regulatory Bodies and Antitrust Laws

Government agencies such as the Federal Trade Commission (FTC) and the Department of Justice (DOJ) enforce federal antitrust laws and promote free trade. Any proposed corporate merger must first meet the regulatory bodies’ approval. Proposed mergers potentially stifling competition and creating an unfair marketplace are typically rejected. The Herfindahl-Hirschman Index, a calculation measuring the degree of concentration in a given market, is one tool regulators utilize when making decisions about a potential merger.

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