What is a Price Setter?

A price setter is an entity that has the ability to set its own prices, because its products are sufficiently differentiated from those of competitors. A firm is better able to set prices when it has a significant amount of market share and follows a clear pricing strategy. Price setters are also more common in industries that have high barriers to entry; in these situations, it is hard for new entrants to gain access to the market, so existing market shares tend to be very sticky. This means that the firm with the largest market share tends to stay in that position, and so has the ability to become the industry price setter for an extended period of time.

Example of a Price Setter

An example of a price setter is Rolex, which makes fine automatic watches. It has strong brand loyalty, which allows it to slowly increase prices year after year, resulting in increasing profits. Other watch companies tend to charge less, because they have not established such a strong brand. If they were to increase prices, they would likely lose customers to the offerings of cheaper competitors.

What is a Price Taker?

Most organizations are price takers, who have to adhere to the current market price when setting the prices of their goods or services. These tend to be smaller entities with products that are not clearly differentiated from those of the competition. In this situation, they can only compete on price. If they were to raise their prices, then customers would switch to cheaper competing products, resulting in a rapid decline in market share and profits.