What Is a Price Taker: A Comprehensive Guide

In conditions of perfect competition, there is an important concept: price takers. They adapt to the market. Since almost any market is competitive nowadays, it is necessary to understand which companies fall under the concept of price takers.

Price takers of course exist in a monopoly, there are just not so many of them. However, in conditions of perfect competition, almost all companies are price takers. In this article, we will analyze different examples of price takers in different markets.

Price takers are companies or brands that adjust their prices to market conditions. They have to do this in order to stay competitive. They don't have enough power or a large enough market share to subjugate the market rather than obey it.

As a rule, price takers are forced to keep their prices at a low (relative to the market) level, and also keep costs at a low level. This is the only way they will be able to keep their share of buyers. A large number of price takers arise in a market where many brands offer identical products. Then competitors are forced to attract their customers not only by the price, but by some additional features of their product.

The bottom line is that the price takers do not set the prices they would like to set; they set prices that can be competitive based on the prices of other brands on the market.

Some companies, such as Coca-Cola and Pepsi, are price takers due to factors like a seamless flow of information, lack of barriers to entry or exit, and product homogeneity in perfectly competitive markets. Profit maximization is achieved by equalizing the cost of production and revenue from selling products. Price stability is a benefit of a perfectly competitive market.

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. Information about brand pricing methods and strategies should be publicly available. This means that each market entity has access to data on what prices there are, and on what basis each company sets them. And if the price of one brand increases, then customers, instead of overpaying, go to other competitors with lower prices.
• Lack of barriers. In perfect competition, companies do not have pricing power; therefore, brands can enter and exit the market without difficulties.
• Product homogeneity. Companies like Pepsi or Coca-Cola offer homogeneous products. Accordingly, in conditions of perfect competition, they are forced to fight for the attention of the buyer and differentiate their product.
• Profit maximization. Keeping prices at a certain level leads to profit maximization. This creates a balance between marginal revenue and marginal costs. In a perfectly competitive market, profit maximization should be achieved by equalizing the cost of production and revenue from selling products.

Various examples can illustrate the idea of price takers. For instance, a wheat farmer can only sell their product at the market price, while individual investors in the stock market are also considered price takers.

Going further, one can also offer several more in-depth examples:

Basic prices in the aviation industry practically do not differ from one company to another. To stand out from the competition, a company can provide additional, unique services. The question will be whether buyers will be willing to pay extra for these services, or will prefer a more budget option.

Various financial companies have a fixed price for each service; surcharges can only be for additional services. Thus, the client, knowing how much the service costs on average, will not overpay. This means that the prices of most financial companies will not differ much.

Stock exchanges and other capital market institutions are designed so that the majority of participants act as price takers, as the price of securities is heavily influenced by supply and demand. Institutional investors are the exception, as they can affect the market as price makers. The majority of daily traders are also price takers.

Thus, stock exchanges are an example of a market with mostly price takers:

• Individual investors. Individual investors do not have pricing power because they trade in small volumes. Accordingly, they buy and sell assets at prevailing market prices.
• Small firms. Small firms cannot influence market prices and are considered as price takers. Although they have more power and influence than individual investors, it is still insufficient to classify them as price makers, since they cannot affect the supply or demand of securities.

All firms in a perfectly competitive market are price takers for the following reasons:

• A large number of sellers. In a competitive market with many buyers and sellers offering identical products, no single seller can affect the prices. Attempting to do so would result in significant losses, as buyers are unlikely to purchase from a seller who prices their products higher than others.
• Homogenous goods. If the products of the companies are identical, then there are difficulties with the promotion of their product. Customers are not inclined to constantly take goods from the same brand, especially if these products are homogeneous. Therefore, in this case, companies need to competently differentiate their product in order not to lose demand.
• No barriers. Perfectly competitive markets have no entry or exit barriers, allowing companies to freely enter or exit as they please, resulting in a lack of pricing power and making them price takers.
• Information flow. In a perfectly competitive market, information flows seamlessly. Buyers are knowledgeable about the market prices of goods. If a seller attempts to charge above the prevailing price, buyers will become aware and refrain from purchasing. As a result, the seller must accept the market's prevailing price.

In a monopolistic or oligopolistic market, there are one or two companies that set prices. They are price makers. They do not rely on the prices of other brands; they own the majority of customers and they set the prices they want.

Other companies that have entered this industry will be forced to set their prices lower than those of monopolists in order not to lose their portion of the customers. Otherwise, buyers will prefer a cheaper and, more importantly, a more familiar brand. So it will not be easy for a young brand to gain a foothold in a monopolistic market.

Summing up, we can say that if your brand does not have a monopoly on the market, then you will most likely have to adjust to competitive prices and be a price taker. However, it is possible to analyze the market and set prices in accordance with an effective pricing policy that will bring income to your company. In this case, Priceva’s Price Comparison Software will help you.

The price taker concept is relevant for markets where individual buyers and sellers cannot influence the market price, such as in perfectly competitive markets. In such markets, each participant is a price taker and must accept the prevailing market price.

A price taker is an economic agent who has no control over the price of a good or service and must accept the prevailing market price.

On the other hand, a price maker is an economic agent who has some degree of control over the price of a good or service due to their market power.

Perfectly competitive markets are unrealistic because there are many factors that can prevent them from occurring, such as barriers to entry, imperfect information, and the market power of some firms. Additionally, it is difficult to achieve perfect competition in practice because it requires a large number of small firms that produce identical goods or services, all with equal bargaining power and perfect access to information.