Question

Describe the difference between price-setters and price-takers, giving examples of each. Explain why your examples are price-setters or price-takers.

Answer 1

a price taker  is a company that accept prevailing market prices for its products (because its number of transactions are unable to affect the market prices). Price takes accept market price and stay alive in the market.

a price setter is a company that's powerful enough to set the market price that they can charge customers with. The greater the market share that company has, the more market power in setting prices it has. Price setters sets price.

Example:

Assume Company XYZ makes tires that sell for $150 each. Company XYZ makes 50,000 tires a year.

there is a lot of competition in the tire market, Company XYZ is not in a position to dictate the price of tires in the market. It must price its tires competitively in order to attract customers, because there are a lot of other substitutes available. Thus, Company XYZ can't raise the price of its tires without losing some customers to competitors, either. Company XYZ does not really have an impact on the general market price of tires and must therefore work within existing market prices.

Similarly, price takers in the trading market cannot dictate the price at which they will buy shares or sell shares; they are constrained by the broader supply and demand requirements of the market. In turn, the buy and sell decisions of price takers have very little if any effect on the market prices.

Example Price setter:

Assume Company XYZ makes a device that can change red streetlights to green. It holds a patent on the technology and no other companies have been able to design competing devices. The "Red Light Green Light" device is priced at $1,000 but costs XYZ only $250 to make . Company XYZ only makes 50,000 units per year, but the demand for the device is much higher.

Because there is no competition, Company XYZ is in a position to dictate the price of the device. As a price maker, it can raise the price of the device to $2,000 or even more as long as the demand for the device holds.