Question

Why do firms prefer being price setters over being price takers, even in the absence of monopoly? explain with an example.

Answer 1

Why do firms prefer being price setters over being price takers, even in the absence of monopoly? explain with an example.

Ans.

Firms generally prefer to be price maker or setter in the market but it is only possible in pure monopolies as they are able to take advantage of single demand and market demand curve, giving monopoly firm the right to settle price anywhere on demand curve. Firm will only be able to set price if they are offering differentiate product and was able to find that customer segment which can pay the price it decides. This will also depend upon the ability of the firm to influenced price elasticity for that market, the more inelastic the demand the more firm decide the price.

Firms prefer being a price setter because they can derive maximum revenue from the market hence as monopoly rarely exist firms mostly are price takers. In perfect competition all information are available firm will accept price set by the market forces of supply and demand and firms are not able to set their own price.

For example, the cement industry lot of players are there but the market is dominated by few big players who come together to form the cartel to decide the price because they want to earn the highest profit by selling at higher margins. similarly OPEC countries for petrol price to curb supply and drive prices up.