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A price maker is a firm that holds a great deal of influence in a particular marketplace, often to the point of being able to influence the upward or downward movement prices within that market. A position of this type is sometimes referred to as monopolistic competition, since the price maker has a degree of influence that is not enjoyed by other firms competing in the same market. This is in contrast to price takers who typically go along with the current standard pricing in the market, since they are not in a position to exert enough influence to move that price in any direction.
The typical price maker is a firm that has a considerably larger market share than any of its competitors. In addition, the production capacity of the business is such that it is able to manufacture goods in quantities that allow it to keep production costs at the lowest possible level, effectively increasing the potential profit for each unit that is sold. This state of events allows the business to examine the current level of supply and demand, identify the unit price that allows the business to make the most return, and effectively set the standard for the entire industry. In the best of situations, that unit price is also one that is low enough to inhibit competitors from being able to offer lower pricing and still earn a decent level of profit.
When this is the case, the price maker sets the standard for pricing on those goods and services, and competitors must in turn consider that pricing in order to hold on to their current market share and remain in business. When a company is not able to at least match that pricing, the possibility that it will lose customers and eventually become unprofitable increase dramatically. For this reason, it is not unusual for competitors to monitor the strategies employed by a price maker, and adapt them to their own purposes when and as possible.
In order to place some limits on the ability of a price maker to monopolize a given market, many governments create agencies that monitor matters of commerce within their borders. In some instances, a price maker may be restrained from lowering prices to a level that would drive all other competitors out of business, and thus leave the maker as a monopoly that controls the entire market. Often, the motivation for restrictions of this type are based on the concepts of allowing consumers to always have choices, and also to promote competition that in turn encourages research and the development of new and better products for consumption by customers.
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