Price Maker

What Is a Price Maker?

A price maker is an entity, such as a firm, with a monopoly that gives it the power to influence the price it charges as the good it produces does not have perfect substitutes. A price maker within monopolistic competition produces goods that are differentiated in some way from its competitors' products. The price maker is also a profit-maximizer because it will increase output only as long as its marginal revenue is greater than its marginal cost. In other words, as long as it is producing a profit.

Understanding Price Maker

In a free enterprise system, prices are greatly determined by supply and demand. Buyers and sellers exert influence over prices resulting in a state of equilibrium. However, in a monopolistic environment, one company has absolute control over the supply released into the market allowing that business to dictate prices.

For example, in the case of a equity, someone who holds the majority of a company's stock could affect the price of the stock if they bought or sold that stock. Without competition, the seller may keep prices artificially high without concern for price competition from another provider. The scenario is typically unfavorable for consumers because they have no way to seek alternatives that may lower prices.

Types of Price Makers

In a multiplant monopoly, firms with many production plants and different marginal cost functions choose the individual output level for each plant.

In a bilateral monopoly, there is a single buyer, or monopsony, and a single seller. The outcome of a bilateral monopoly depends on which party has greater negotiation power: one party may have all the power, both may find an intermediate solution or they may perform vertical integration.

In a multiproduct monopoly, rather than selling one product, the monopoly sells several. The company must take into account how changes in the price of one of its products affect the rest of its products.

In a discriminating monopoly, firms may want to charge different prices to different consumers, depending on their willingness to pay. The level of discrimination has various degrees. At the first level, perfect discrimination, the monopolist sets the highest price each consumer is willing to pay. At the second level, nonlinear price fixing, the price depends on the amount bought by the consumer. At the third level, market segmentation, there are several differentiated consumer groups where the firm applies different prices, such as student discounts.

In a natural monopoly, because of cost-technological factors, it is more efficient to have one firm responsible for all the production because long-term costs are lower. This is known as subadditivity.

Regulatory Bodies and Antitrust Laws

Government agencies such as the Federal Trade Commission (FTC) and the Department of Justice (DOJ) enforce federal antitrust laws and promote free trade. Any proposed corporate merger must first meet the regulatory bodies’ approval. Proposed mergers that could potentially stifle competition and create an unfair marketplace are typically rejected. The Herfindahl-Hirschman Index, a calculation measuring the degree of concentration in a given market, is one tool regulators use when making decisions about a potential merger.