Table of contents
What is a price taker?
A price taker is a company or an individual that should accept prevailing special prices in a market. The key aspect is that price takers lack the market share to influence the market in any given way. In perfect competition, all participants can be considered price takers. Besides, the same thing happens in markets where every firm sells an identical product. There are no specific barriers to entry, all companies have a small share, and everything is known about the market.
It is crucial to indicate that a price taker situation often occurs in a competitive market. Essentially, it happens when many competitors offer customers various alternatives to buying a particular product. Another precondition for price takes occurs when demand falls within an industry. It results in boosted production capacity while there are only a few customers available.
Keeping that in mind, facing such a competitive market, sellers try to find the market price that will meet the purchasing behaviors of a small fraction of customers in the market. In such a case, firms are forced to keep the costs low for the sake of attracting orders and meeting raising production. Considering the insights from price takers, the key indicator is that companies need to keep their product lines differentiated. Instead of constantly lowering the market price in a competitive market, new products and services are required.
In addition, additional attention should be given to the condition of price takers in a perfectly competitive market. A perfectly competitive market is represented through a range of factors:
- All the companies on the market have identical products to sell.
- The market has a large number of both buyers and sellers.
- The buyer has direct access to the price charged for a product by every competitor.
- A market lacks any barriers to entry or exit.
At this point, a perfectly competitive environment is a breeding ground for a price taker. Competition creates all the prerequisites for a stable market price and the fact that both buyers and sellers can find a price margin beneficial for everyone.
Firms that are price takers
Many companies are price takers. In terms of obvious examples, one can think about Coca-Cola Co and Pepsi. In addition, a price taker is likely to emerge from the oil and gas industry. These are the prime examples of the phenomenon. Why? Namely, because in such settings, the price is set strictly by supply and demand.
When it comes to understanding the reasons firms like Coca-Cola and Pepsi are considered price takers, it is important to focus on five particular reasons:
- Information flow. In a perfectly competitive market, the one creating conditions for price takers to emerge, there must be a seamless flow of information. It means that all the economic parties existing in the market are aware of the pricing strategies within the market, as well as the pricing methods used by competitors. If any business tries to bump up the price in such a context, everyone else will be aware of that, and buyers will move to competitors instead of paying a higher market price.
- Lack of barriers. Essentially, it means that in a perfectly competitive market, any company can easily enter or exit a market. The fact of easy entry and exit suggests that the economic parties involved do not have pricing power.
- Product homogeneity. Companies like Coca-Cola and Pepsi become price takers because they offer similar products. In a perfectly competitive environment, product businesses like Coca-Cola must produce an abundance of buyers. Consumers are not inclined to purchase a specific product from a particular seller. In such a context, pricing power is generated by product differentiation.
- Profit maximization. One of the key business objectives is to sell products at a particular level leading to the maximization of profits. It is the environment in which the marginal revenue equals the marginal cost of producing goods. In a perfectly competitive market, profit maximization should be achieved by equalizing the cost of production and revenue from selling products.
- A number of sellers and buyers. In a perfectly competitive market, a business can't influence the price of products. Selling identical products relies on a massive number of buyers and sellers. In such a situation, even if one company tries to boost prices, it faces a major risk of getting losses because consumers will simply switch to competitors that avoided raising prices.
Firms that are price takers exist in a particular business environment. The factors mentioned above characterize such conditions and show what it brings to all parties involved. Essentially, one of the pros of a perfectly competitive market is price stability and that businesses cannot manipulate prices of their will.
Price takers examples
There is a range of examples possible to encapsulate the concept of price takers. When it comes to simple examples, one can imagine a farmer producing wheat as a key commodity. The farmer can sell the product only within the margins of a prevailing market price. In addition, another apparent instance of people working in the stock market. Essentially, individual investors constitute price takers.
Going further, one can also offer several more in-depth examples:
- The air travel industry. There are many airlines offering flights to similar destinations. The crucial thing is that the basic fare for the companies will be almost identical. Importantly, the differences in prices may occur within the scope of specific additional services offered by each airline. However, if one airline charges much higher than others, it will lead to customers buying tickets from the business’s competitors.
- Financial services company. The companies operating in such industries charge a price for providing financial services to clients. Often, buyers are aware of fees charged by different companies in the sector. Naturally, customers avoid financial service companies charging higher prices.
All in all
Price takers exist in perfectly competitive markets. There are particular prerequisites for the existence of such environments. However, they are often represented by many sellers and buyers, a seamless flow of information, identical products, and a lack of barriers for entry and exit.
Find answers to some of the most common questions people have regarding the use of Competera.
What is a Price Taker?
A price taker is a company or an individual that should accept prevailing special prices in a market. The key aspect is that price takers lack the market share to influence the market in any given way.
For which markets is the Price Taker concept relevant?
Price Taker concept works best at perfectly competitive markets with high price stability so the businesses cannot manipulate prices of their will.