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What Is a Free Price System?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 05 November 2016
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    Conjecture Corporation
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A free price system is a type of economic system in which supply and demand are the primary drivers of what occurs in the economy. With this approach, the opportunities for companies to create and market goods and services are limited only by the interest level of consumers and their willingness to buy those products. With a purer free price system, governmental intervention in terms of imposing standards and trade regulations is either non-existent or kept to an extreme minimum. While a number of nations are sometimes touted as using this type of economic system, many actually use a combination of free price and fixed price system.

The free price system is the opposite of what is known as a controlled or fixed price system. With the latter, there is a great deal of governmental control in regard to what is manufactured, how the sale of the goods are allocated, and even how the goods are priced. While restrictive, the fixed price approach has successfully been used in some nations to ensure that essential goods and services are available to even the poorer classes in society. At the same time, a fixed price system does little to promote competition, especially when a considerable percentage of the major industry within a nation is directly owned and operated by a government.

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By contrast, a free price system allows a great deal of room for competition. Since supply and demand are the main drivers of this type of economic approach, any company that can develop a product with sufficient appeal to consumers has the potential to capture some amount of market share. Businesses can readily compete in terms of price as well as quality, with consumers ultimately deciding how much of a good or service they desire, and how much they are willing to pay for those products.

Many nations today operate with what is sometimes called a mixed price system. This approach attempts to draw upon the more desirable aspects of both the free price system and the fixed or controlled price system, while avoiding the potential drawbacks such as limiting the range of goods available from multiple providers or the pricing of goods in a manner that makes them out of the financial reach of a considerable number of consumers. With this integrated approach, there is still plenty of opportunity for competition among existing companies as well as room for new companies to develop and enter the marketplace. Consumer demand still has a significant impact on the supply provided by those companies, but there are trade regulations that do set some limits on prices and how those companies go about doing business.

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