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Most companies in the world are price takers and not price makers. This is because the number of small businesses is bigger than the number of big businesses. A price maker can be a monopoly or a firm within a monopolistic competition. It is defined as a price maker because it has the power to determine the price at which goods and services can be sold in the market.
A price maker can only increase its output if its marginal revenue is more than its marginal cost that is if its making a profit. On the other hand, a price taker is a firm within a perfectly competitive market that does not have any power over its prices. In such a market, the price is determined by the forces of demand and supply, and the firm is left with no option than to take the prices (Schenk, 2010).
I think the major pharmaceutical companies in the United States are price makers. This is because, over the past few years, the industry has been raising prices at a very high rate even after promising to drop the prices after the legislation is passed. These companies have power over the consumers since after raising the prices; they still maintain their market share. However, they have taken this advantage to exploit their customers, especially those who have to take daily medication.
The U.S. major pharmaceutical companies produce high-quality drugs and have been able to earn their customers confidence, and thats while they can maintain their market share even after charging high prices. However, some critics affirm that the industry is raising prices as a way of establishing a high price base before the legislation to curb prices is passed.
A monopoly firm is one that has power over the prices charged in the market. It can raise or lower the prices of its products as it so wishes. Most businesses aim at being a market monopoly so that they can exercise control over their products. A monopoly market occurs due to various reasons. Some of these reasons are:
- when an individual or business partners acquire unique resources for the production of a product
- when an individual gets the highest level of skills in a certain service
- when a company has patent rights to the use of certain technology that can not be imitated, for instance, the coca cola company
- when the product produced has outstanding utilities and is also friendly to the consumers
Under monopolistic competition, there are many sellers who produce alike but somewhat differentiated products. They have the power to determine the quantity to offer for sale as well as the price without affecting the other players in the market. Another characteristic of a monopolistic competitive market is that any one can enter it as long as he has sufficient knowledge and produces differentiated products.
An example of a monopolistic market is the hairdressing industry, where we have many hairdressers with similar but differentiated services (Schenk, 2010). They have the power to determine the price to charge for their services without affecting the others in the industry. The difference between a monopoly and a monopolistic market is that, in a monopoly, there is only one firm that produces a certain product whereas, in a monopolistic market, there are many suppliers producing differentiated products.
In a pure market structure, we have many buyers and sellers, and there is also freedom of entry. The sellers do not have the power to determine prices (that is, there are price takers) since they produce similar products, and raising the prices would mean fewer returns. The only way to attract more customers is to sell at a slightly lower price than the one offered at the market. An example of a pure market is the agricultural market where we have similar products such as tomatoes being produced by many people.
An oligopoly market is composed of very few large companies which produce differentiated or identical products. There exist barriers to entry into an oligopoly market such as high start-up cost, and government authorization, which makes it hard for other firms to enter the market (Schenk, 2010).
This gives the oligopolistic companies more power to control the quantity and price in the market. The steel industry is a good example of oligopoly markets. By getting bigger, these companies can enjoy economies of scale by selling huge amounts of products at high prices.
Reference List
Schenk, R. (2010). The demand curve for output. Web.
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