Price maker
Also called: Price setter · Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
A price maker is a firm that can choose its own price because it faces a downward-sloping demand curve. If it raises its price, it loses only some customers, not all of them. To sell one more unit, it must cut the price on every unit it sells. So its marginal revenue (MR), the extra revenue from one more unit, is less than its average revenue (AR): MR < AR.
Monopoly is the clearest case. Firms under monopolistic competition and oligopoly are also price makers to some degree.
Example
Indian Railways, as the only rail passenger service, sets its own fares. A branded soap maker can also price its soap somewhat above rival brands and still keep loyal buyers.
Don't confuse with
- Price taker: a firm under perfect competition that must accept the market price. Its demand curve is horizontal, so AR = MR = P. If it charges more, it sells nothing.
Related concepts
- Market structure
- Market power
- Barriers to entry
- Product differentiation
- Market concentration
- Herfindahl-Hirschman Index
- Concentration ratio