In pure monopolies the firm is a price maker as they are able to take the markets demand curve as their own. The monopoly firm is able to set the price anywhere on this demand curve.
The ability of the monopoly firm to set price is dependent on price elasticity of the product – if demand is elastic it will limit the firms price setting power.
Price Takers
- Firms in perfect competition are price takers
- All businesses have to accept the price that is set by the market
- Firms are not able to set their own price
Price Makers
- As pure monopolies rarely exist having one firm as a price maker is unlikely
- If firms are able to set prices in a market the extent to which they can is influenced by price elasticity for that market, the more inelastic the demand for a product the more a firm can set the price
The Video below explains more about price takers and price makers and the markets in which they operate.
Factors that Influence the Ability of a Firm to be a Price Maker
Only firms in pure monopolies can be price makers. This means that there must be:
- Barriers to entry and exit
- Only one producer / firm in the market
- Imperfect knowledge
In reality this is seldom the case and pure monopolies rarely exist. Very few markets are dominated by just one firm – it is more likely that they are dominated by a few major firms who are able to act as price makers.
Barriers to entry do exist in many markets however they may be overcome in a number of ways including:
- Takeovers from outside / inside the industry
- Growing markets
- Increased overseas competition
- Transfers of brand names between sectors of the economy in companies that differentiate their product offerings
