Price-Taker

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What is a 'Price-Taker'

A price-taker is an individual or company that must accept prevailing prices in a market, lacking the market share to influence market price on its own. All economic participants are considered to be price-takers in a market of perfect competition, or one in which all companies sell an identical product, there are no barriers to entry or exit, every company has a relatively small market share, and all buyers have full information of the market. This holds true for producers and consumers of goods and services and for buyers and sellers in debt and equity markets.

BREAKING DOWN 'Price-Taker'

In the stock market, individual investors are considered to be price-takers.

In most markets, firms are price-takers. If firms charge higher than market prices for their products, consumers simply purchase from a different seller, highlighting how firms are price-taking to the extent that they sell identical (substitutable) goods or services as their competitors. Grain is an example of a good that is almost identical in quality between its many sellers, so the price of grain is determined by activity in domestic and global markets and commodities exchanges.

The market for oil is different. It has relatively steep barriers to entry as a seller, due to the high capital costs and expertise needed to drill or refine oil, as well as the high bidding price of oil fields. As a result, there are few oil-producing firms, and most gasoline and other petroleum-product consumers are price-takers – they have no producers to choose from outside a handful of global companies. This underscores how a consumer is price-taking to the extent that he can't or doesn't want to produce the good. Due to intense competition between these firms, consumers still get oil at low prices. The Organization of Petroleum Exporting Countries (OPEC) has power to move prices up and down through controls on output.

The nature of an industry or market greatly dictates whether firms and individuals are price-takers.

Different Types of Markets

A perfectly competitive market is rare. In most markets, each firm or individual has a varying ability to influence prices, either through sales or purchases. The polar opposites of perfectly competitive markets are monopolies and monopsonies. A monopoly is a market in which a single seller or a group of sellers controls an overwhelming share of supply, giving the seller or sellers the power to drive up prices on their own. OPEC has a monopoly to a degree. A monopsony is a market in which a single buyer or a group of buyers has a significant-enough share of demand to drive prices down.

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