Reviewed by Aug 27, 2020| Updated on
A price taker refers to an individual, organisation, or company who have to accept the prevailing prices since they lack the market share to influence the price. Most of the participants in an economy are price takers, where they sell identical products. This happens as all market participants have full information, and each of them has a relatively small market share.
Understanding Price Takers
In a competitive market where there is no product differentiation, most participant organisations would be price takers. In case an organisation charges a higher price, the customer will shift to the next low-cost seller in view of identical goods sold by the low-cost seller.
An example of a market for identical goods is the foodgrain market. The prices are determined by an interaction of demand and supply in the domestic and international markets.
The low-cost producers will generally have a competitive edge, and they can increase their market share from the high-cost producers. Also, technology gives an edge to certain producers in terms of efficiency and low costs. In such cases, the other producers have to be price takers.
Price-taking behaviour would be different for different commodities. In the case of crude oil, there are few oil-producing firms controlling the production of oil. The buyers of petroleum products and gasoline are mostly price-takers. In the case of petroleum, the Organization of Petroleum Exporting Countries (OPEC) controls the prices and production of petroleum products.
Also, the nature of the industry or the market also determines whether the organisation or firms are price takers. In the case of processed foods sold in a retail supermarket, the customers are price takers in view of fixed retail prices. However, the converse holds good in online-auction sites where potential customers can bid, and sellers become price-takers.
The situation may not be uniform across all market categories with the exception of stock markets where certain individuals or organisations are market makers, and the others are price takers. In the case of a monopoly market, the sellers determine the price such as OPEC.