What is a Price Taker?

A price taker is a business that sells such commoditized products that it must accept the prevailing market price for its products. For example, a farmer produces wheat, which is a commodity; the farmer can only sell at the prevailing market price. As another example, individual investors are considered to be price takers in the stock market.

A price taker situation most commonly arises when there are many competitors, so there are many alternatives available to buyers. This situation can also occur when demand falls within an industry, resulting in lots of production capacity chasing too few customers. In this case, companies are forced to keep their prices low in order to attract orders and fill their available capacity.

Best Practices for a Price Taker

There are several best practices that a price taker can employ to enhance its profitability. They are as follows:

Differentiate products. From a strategic perspective, a business should always try to differentiate its products, so that it can charge a higher price than the market price imposed on undifferentiated products. Such behavior results in above-average profits, but also requires expenditures to support the differentiation process. This can mean that a business needs to address a specific market niche where its product innovations will attract a higher price, but also where the cost of its innovations is sufficiently modest that it can still enhance its profits.
Reduce costs. If it is impossible to increase prices, then the only other option for increasing profits is to cut costs throughout the organization. If the firm can drive down its costs more than those of the competition, then it can enhance its profitability to a level above that of the industry as a whole.

Price Taker vs. Price Maker

The reverse of a price taker is a price maker; this entity sells in such volume or has such differentiated products that it can set prices that customers will accept. A price maker tends to have a significant market share.