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.

How to Compete Against a Price Setter

There are several ways to compete effectively against a price setter. These strategies are as follows:

Product differentiation. You can sidestep the pricing issue by offering customers notably higher-quality goods and services, or by providing them with a unique value proposition.
Compete on non-price factors. You can compete against a price setter by focusing on non-price factors, such as by establishing a strong brand, providing better customer service, or by making it easier to purchase your products.
Reduce costs. If you reduce your costs, then you can still earn significant profits even when the price leader is setting low price points. This can be achieved through lean manufacturing techniques.
Innovate. If you continually engage in innovation, you can increase efficiency levels, reduce costs, and provide better products - to the point where you may eventually be in a position to take over as the price leader.

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.