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.
In the stock market, individual investors are considered to be price-takers, while market-makers are those who set the bid and offer in a security.
Being a market maker does not mean that they can set any price they want. Market makers are in competition with one another and are constrained by the economic laws of the markets like supply and demand.
In most competitive markets, firms are price-takers. If firms charge higher than prevailing market prices for their products, consumers will simply purchase from a different lower-cost seller to the extent that these firms all sell identical (substitutable) goods or services.
Grain markets such as for wheat are a prime example of a good that is almost identical in quality between its many sellers, so the price of grain is determined by competitive activity in domestic and global markets and commodities exchanges.
In the case of wheat, low-cost producers will have a competitive advantage in that they will be able to drive out high-cost producers and take their market share by offering progressively lower prices. Technological innovation that lowers the cost of production is part of the process of competition whereby capitalist firms have no choice but to be price takers.
The market for oil is slightly different. While oil is competitively produced as a standardized commodity on a global market, it has 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 relatively few oil-producing firms compared to wheat farmers, and so most consumers of gasoline and other petroleum-products are the price-takers—they have few producers to choose from outside a handful of global companies. The Organization of Petroleum Exporting Countries (OPEC) also has great power to move prices up and down through controls on output. This underscores how a consumer is price-taking to the extent that he can't or doesn't want to produce the good on his own.
Nevertheless, due to intense competition and technological innovation among these firms, consumers still get oil at low prices.
The nature of an industry or market greatly dictates whether firms and individuals are price-takers. For example, most consumers in retail markets are, indeed, price-takers. For instance, you walk into a clothing store or supermarket and decide what to buy or not, but you are beholden to the price tag attached to a product. You cannot go to your supermarket and competitively bid for a dozen eggs or a box of cereal, you must take the price being offered, or leave it. Online auction sites such as eBay, for example, allow consumers to bid and so the sellers become the price-takers.
- 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.
- Due to market competition, most producers are also price-takers. Only under conditions of monopoly or monopsony do we find price-making.
- Market makers set prices in financial products like stocks. But market markers are also in competition with one another to trade.
Special Considerations: 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.
[Fast Fact: We're all price-takers. When we go the grocery store, we can decide if we want to buy some item with some price tag, but we do not haggle or enter a lower bid for your milk, eggs, or meat.]