key term - Price makers

Definition

Price makers are firms or entities that have the ability to set the price of their products or services due to lack of competition and market power. This situation typically occurs in markets where one firm dominates or when products are differentiated, allowing firms to influence their prices rather than take them as given from the market. Price makers play a crucial role in imperfectly competitive markets, impacting supply, demand, and overall market dynamics.

5 Must Know Facts For Your Next Test

1. Price makers can influence market prices by adjusting their output levels, which directly affects the overall supply in the market.
2. In monopolistic competition, many firms act as price makers due to product differentiation, allowing them to charge different prices for similar goods.
3. Price makers maximize profits by setting prices above marginal cost, leading to economic profits in the short run.
4. The degree of price-making ability depends on the level of competition within the market; fewer competitors typically lead to greater pricing power.
5. Price makers often engage in strategic behavior, such as advertising and branding, to strengthen their market position and sustain their ability to set prices.

Review Questions

• How do price makers utilize their market power to influence supply and demand?
  • Price makers use their market power by controlling output levels and adjusting prices according to consumer demand. By producing less and raising prices, they can create a scarcity effect that drives up demand for their product, allowing them to increase profits. Conversely, if they need to sell more, they might lower prices, demonstrating their direct impact on supply and demand dynamics in the market.
• Discuss how barriers to entry impact the ability of firms to become price makers in an industry.
  • Barriers to entry create challenges for new firms wanting to enter a market, which can solidify the position of existing price makers. High startup costs, regulatory requirements, or strong brand loyalty can prevent competition from eroding the pricing power of established firms. This results in a situation where current price makers can maintain higher prices without fear of new entrants undercutting them.
• Evaluate the implications of price discrimination for both consumers and price makers in an imperfectly competitive market.
  • Price discrimination allows price makers to charge different prices based on consumer willingness to pay, maximizing profits while potentially increasing consumer surplus. However, this practice can lead to negative perceptions among consumers who may feel exploited. For price makers, while this strategy can enhance profitability in the short term, it also risks attracting regulatory scrutiny or backlash from consumers seeking fairness in pricing.

Related terms

Market Power:

The ability of a firm to influence the price of a good or service in the market due to its control over supply or demand.

Price Discrimination:

The practice of charging different prices to different consumers for the same good or service, often used by price makers to maximize profits.

Barriers to Entry:

Obstacles that make it difficult for new competitors to enter a market, often allowing existing firms to maintain their price-making power.