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Price Takers

Updated on April 4, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Price Taker Definition

A price-taker is an individual or firm with no control over the prices of goods or services sold since they usually have small transaction sizes and trade at prevailing prices in the market.

Key Takeaways

  • A price taker refers to an individual or firm with no control over the prices of the goods or services they sell. 
  • Capital market institutions, such as stock exchanges, are designed to facilitate trading among participants. As a result, most participants in these markets are price takers, meaning that supply and demand changes have a significant impact on security prices.
  • In a perfectly competitive market, all participants are price takers. This is because many sellers offer identical products, no barriers to entry or exit, perfect information, and no market power to influence prices.

Examples of Price Takers

Some examples of a price taker are given below: –

Example #1

Let us look at the air travel industry. Multiple airlines provide flight services from one destination to the other. The basic fare for all these airlines would be almost identical. The difference could come in additional services like meals, priority check-in, etc. Suppose one airline charges a much higher amount than its peers for the same category of products; people will buy tickets from the lower-priced airline.

Price takers

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Example #2

Another example can be a financial services company. These companies charge a certain price for providing services to their clients. Now, these clients know the amount charged by different companies to avoid any company setting higher than the others. The prices may vary for special services that add to the basic ones, but similar services would remain at the same level as their competitors.

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Price Takers in Capital Market

Capital marketCapital MarketA capital market is a place where buyers and sellers interact and trade financial securities such as debentures, stocks, debt instruments, bonds, and derivative instruments such as futures, options, swaps, and exchange-traded funds (ETFs). There are two kinds of markets: primary markets and secondary markets.read more institutions such as stock exchanges are design-made so that most participants are price takers. That is because demand and supply heavily influence the price of securities. Still, there are large participants such as institutional investorsInstitutional InvestorsInstitutional investors are entities that pool money from a variety of investors and individuals to create a large sum that is then handed to investment managers who invest it in a variety of assets, shares, and securities. Banks, NBFCs, mutual funds, pension funds, and hedge funds are all examples.read more who can change this demand and supply, affecting the costs of the securities. They are known as price makersPrice MakersPrice maker (P-M) refers to a firm having enough market power to control the market prices of its products and services without losing its customers.read more. Besides these participants, most people who trade daily are price takers.

Therefore, we can take a stock exchangeStock ExchangeStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more as a general example of a market where most participants are price takers.

  • Individual Investors: Individual investors trade in minimal quantities. Their transactions have no one to negligible impact on the prices of the securities. They take prevailing prices in the market and trade on those prices.
  • Small Firms: Small firms are also price takers because their transactions cannot influence market prices. Granted, they have relatively more power and influence in the market than individual investors. However, it is still not enough to shift them into the price-makers category as they can still not influence the demand or supply of the securities.

Price Takers (Perfect Competition)

All firms in a perfectly competitive marketPerfectly Competitive MarketPerfect competition is a market in which there are a large number of buyers and sellers, all of whom initiate the buying and selling mechanism. Furthermore, no restrictions apply in such markets, and there is no direct competition. It is assumed that all of the sellers sell identical or homogenous products.read more are price takers for the following reasons:

Price Takers (Monopoly/Monopolistic)

As opposed to perfect competition, one or two firms in the market have a monopoly over the products in a monopolistic economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more. Those firms have immense pricing power and can do whatever they want to. Therefore, the rest of the firms become price takers automatically. Let us take an example:

In the soft drinks market, Coca-Cola and Pepsi lead the market. Therefore, they set the prices for their products and enjoy heavy market shares. Now, suppose another company exists in the market. That company cannot set the price of its products higher than these two because, in that case, the buyers would go to the trusted brands that already enjoy a huge market share. Therefore, this company would have to take the price set by Coke and Pepsi to stay in the market. Otherwise, it will incur a huge loss of business and revenue.

Conclusion

Entities that cannot influence the price of goods or services are forced to become price takers. It happens for many reasons, like many sellers, homogenous goods, etc. In a perfectly competitive market, all firms are price takers. And, in monopolistic competition, most firms are price takers.

Firms will sell the products in a perfectly competitive market as long as marginal revenue equals the marginal cost. If the marginal revenue falls below the marginal cost, that will shut the firm down.

Frequently Asked Questions (FAQs)

1. What is the difference between price takers vs price searchers?

Price takers and price searchers differ in their ability to influence the price of the goods or services they offer. Price takers have no control over the prices in the market and must accept prevailing prices, while price searchers have some market power and can influence the price by adjusting their output or marketing strategies.

2. What is the difference between price setters vs. price takers?

Price setters are individuals or firms that can set prices in the market and have some control over the market price. On the other hand, price takers have no control over prices and must accept prevailing market prices.

3. Why are farmers, price takers?

Farmers are typically price takers because they have limited control over the prices of their agricultural products. Factors such as weather conditions, global supply and demand, and government policies affect the market prices of agricultural goods. As a result, farmers must accept the prevailing prices in the market and cannot influence prices through their actions.

This article is a guide to the Price Taker definition. We discuss a price taker firm in perfect and monopolistic competition and price taker examples. You can also learn more from the following articles: –

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