What Is a Price Maker?
A price maker is a company that can dictate the price it charges for its goods because there are no perfect substitutes. These are generally monopolies or companies that produce goods or services that differ from what competitors offer.
The price maker is a profit-maximizer because it will increase output only as long as its marginal revenue is greater than its marginal cost. In other words, as long as it is producing a profit.
- A price maker is an entity that has the power to influence the price it charges as the good it produces does not have perfect substitutes.
- Price makers are usually monopolies or producers of goods or services that differ in some way from their competition.
- The price maker will increase output only if its marginal revenue is greater than its marginal cost.
- Price makers can essentially keep prices artificially high without worrying about price competition from another provider.
- This scenario is typically unfavorable for consumers because they have no way to seek cheaper alternatives.
Understanding the 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. This scenario typically disadvantages consumers because they have no way to seek cheaper alternatives.
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 perform 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 affect 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. At the first level, perfect discrimination, the monopolist sets the highest price each consumer is willing to pay. At the second level, nonlinear price-fixing, the price depends on the amount bought by the consumer. At the third level, 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 to have one firm responsible for 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 that could potentially stifle competition and create 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 use when making decisions about a potential merger.
What Is the Difference Between a Price Maker and Price Taker?
How Can a Company Become a Price Maker?
Generally, a company can only become a price maker if it’s a monopoly or if it supplies a popular good or service that nobody else offers (a patented product no one else makes, for instance) or can easily compete with. The ability to jack up prices is mainly determined by the number of substitutes in the market and the price elasticity of demand.
Do Regulators Condone Price Making?
Companies are free to price their goods as they wish. However, if regulators deem that their pricing strategies are breaching antitrust laws and are indicative of predatory business practices, they can step in and take action.