A price setter is a firm that decides the price of its goods or services based on its understanding of the market, including the degree of demand for the product, the cost of production, and the prices charged by competitors. In many markets, especially those that are less competitive (oligopolistic or monopolistic), a dominant company can become a price setter, with other companies acting as price takers, following the lead of the price setter.
For example, a firm with significant market power or unique product may have the ability to set its prices because it faces little competition, or because its product is in high demand. This is often seen in markets with high barriers to entry or where a single firm controls a large portion of the market.
Price setters have more flexibility to change prices and often have greater potential to make higher profits, as they can increase prices without losing all their customers. However, they also face risks if they set prices too high and customers turn to alternatives or substitutes.
On the other hand, in perfectly competitive markets where products are largely undifferentiated, firms are typically price takers rather than price setters. They have to accept the market price as given because if they try to charge more, consumers will switch to other firms offering the same product at a lower price.
Example of a Price Setter
Let’s take an example from the technology industry.
Apple Inc., the multinational technology company, is a good example of a price setter. Apple has significant market power due to its strong brand recognition, loyal customer base, and unique product offerings.
When Apple launches a new iPhone, it sets the price based on its understanding of consumer demand, the features and quality of the product, the prices of competing products, and its own costs and desired profit margin. Because of Apple’s strong position in the market and the uniqueness of its products, it can set a higher price than what other smartphone manufacturers might charge for their products.
For example, if Apple launches a new iPhone model at a price point of $1,000, it’s not immediately matched by competitors because Apple’s product is seen as unique and it has a loyal customer base willing to pay a premium for its products. Other companies may price their smartphones lower to attract customers who are price-sensitive.
In this case, Apple is acting as a price setter. However, it’s worth noting that even price setters cannot ignore market conditions entirely. If Apple sets the price too high, some customers might decide to switch to less expensive alternatives. Therefore, while Apple has more flexibility in pricing than many of its competitors, it still needs to set prices that will be acceptable to its target customers.
On the other hand, smaller smartphone manufacturers may be considered price takers, as they have less influence over the market price due to their lower market share and less differentiated products. They often set their prices based on the prevailing market conditions, including the prices set by the larger firms like Apple.