Question

Categorize the following as price takers or price makers: perfectly competitive market, monopoly, monopolistic completion, and oligopoly. Explain.

Answer 1

The perfectly competitive market has a large number of producers/seller selling perfect substitute products and as a result of this, there is huge competition among them. The firms in this market structure have no market power and face a perfectly elastic demand for their products. This leads to a situation where no individual seller can charge its own different price. Thus, perfectly competitive markets are price takers.

The situation of monopoly is the general opposite of perfect competition. Here, there is only one seller with high market power and he has full control over prices that he intends to charge for his product. There are no close substitutes available in the market and he is thus safe to charge his price. The monopoly market is thus price maker.

In a monopolistic market structure, there are many firms offering similar but not perfect substitutes products. As a result, the price decisions of any one firm does not directly influence other firms in the market. They share equal and relatively low market power and are thus the price makers.

Oligopoly is a market structure where there are more than two firms. [Market with only two sellers is called duopoly]. The market structure is such that can easy lead to price wars where one firm will try to take up the whole market share by lowering its prices and other firms will follow the suit. In order to avoid this situation, the price in this market are determined jointly by the firms and thus this market structure is also price maker.