Price Setters vs. Price Takers: Pros and Cons

Perfect competition assumes that no supplier would make any meaningful decision regarding the price it sets for its goods. This is, however, not the case because goods and services can easily be replaced by others, making firms primarily price takers. Market equilibrium is determined by the relationship between supply and demand. Thus, buyers and sellers are price takers. Price setters are entities that decide on the prices for the goods or services it provides. Firms can become price setters when it has significant market shares. A firm may also become a price setter where it offers goods or services that are highly distinct from that of its competitors. Price setters exist in a monopolistic market structure. The economic idea underlying monopolistic competition is there are several goods that consumers purchase that, on some level, imperfect substitutes for each other (Anufriev & Kopányi, 2018). This means that monopolies do not interact with other firms strategically that sell different products to the same consumers.

Price takers, on the other hand, have a smaller share of market power. A price taker is therefore compelled to accept the prevailing market price. Perfectly competitive firms are regarded as price takers. The price takers exist because there are several buyers and sellers of the product or service. The similarity of products in the market restricts price-makers from determining their prices. The ease of access by buyers to price information also differentiates price-takers from price sellers. Additionally, firms that are price takers have easier access to enter and leave the market. This is due to the similarity of products from sellers. Where a price taker attempts to charge more of the set price, it shall not make sufficient sales. Perfectly competitive firms price their products strategically, in a manner that guarantees maximum output and minimum losses (Anufriev & Kopányi, 2018). Price takers increase production and not prices and aim to increase profits. It also responds to losses by exiting the market or lowering production.

There are varied benefits and shortfalls that accompany price setters and price takers. For price takers, the primary advantage is existing in a monopolistic market structure. Price setters do not have to compete as price takers do. Suppliers who wish to compete with a monopolistic firm will typically find it challenging. The demand curve of a price setter directly corresponds to the production of the firm. This enables the firm to earn maximum profit. Price setters can increase the price above the competitive level to maximize their profits further. Such profits can be utilized for research aimed at protecting the firm in the onset of economic difficulties. Additionally, price setters can benefit from economies of scale. Economies of scale occur with an increase in output to lower running costs (Anufriev & Kopányi, 2018). The shortfalls of price-setting include setting high prices that make it harder for the consumer to afford. This results in allocative inefficiency. The absence of competition may lead firms to slack or lack incentive to produce quality goods. Price setters may also suffer diseconomies of scale. Furthermore, the power that price setters hold may gain political favor in a manner that may be detrimental to society.

Price takers benefit from minimal externalities. The availability of information among all participants is beneficial to price takers. The presence of perfect knowledge of goods reduces the cost of advertising and minimizes risks. Further, a competitive market enjoys limited legislative regulation. Minimal government regulation allows for ease of entry and exit of firms in the market. In addition, the availability of knowledge will enable consumers to make rational and informed purchases to maximize their utility. Consumers additionally benefit from a wider choice of output. Producers can also utilize perfect knowledge to maximize their self-interests, consequently maximizing profit. The shortfall encountered by price takers is the lack of capacity to influence market price(Anufriev & Kopányi, 2018). It does not enjoy the flexibility of price setters to increase or decrease the market price of goods or services. With increased competition due to the homogeneity of products, firms can only make normal profits. It is argued that a perfect competition, such as that offered by price takers, produces the best outcomes for society and consumers.

It is recommendable for Dr. Jones to evaluate the nature of the service of the new medical practice. Medical providers tend to use varied prices for the medical care they provide. Where the medical practice uses high-quality equipment and quality services, the price for services is increased (Roberts,2017). The overall pricing of medical care is reliant on the quality it seeks to provide. Considering medical services are offered widely, Dr. Jones’s practice would not significantly differ from the existing firms. By being a price taker, Dr. Jones will allow for easier access to medical care for a broader population. I, therefore, recommend Dr. Jones accepts the prices already set by third-party players. His practice shall be able to provide equal opportunities for all consumers to access medical help. A wider clientele shall maximize profits.

References

Anufriev, M., & Kopányi, D. (2018). Oligopoly game: Price makers meet price takers. Journal of Economic Dynamics and Control, 91, 84-103.

Roberts, E. T., Mehrotra, A., & McWilliams, J. M. (2017). High-Price and Low-Price Physician Practices Do Not Differ Significantly on Care Quality or Efficiency. Health Affairs, 36(5), 855-864. Web.

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