The first economic concept I learnt is the price is determined by the market supply and demand and both the supply side and the demand side are price takers when the market is perfectly competitive. However, I always wonder how realistic the term “price taker” exists in the real world.
Many people who do not learn any economics commonly think that the supply side including companies and producers is setting the prices for their customers, and most customers are price takers. This is not surprising, in every Apple’s product announcement event, we can see the Apple CEO announces the prices the company sets for their new iPhones and other new products. In supermarkets, we see the price labels and feel we do not have the power to influence the prices. Therefore, it is not surprising our customers at most time feel they are price takers and feel the supply side sets the prices for them.
I do agree with them that I also feel that companies are commonly price makers and customers are price takers. This is because I think nowadays many markets are not perfectly competitive and companies are able to differentiate their products from their competitors and gain enough market powers to set prices. Of course, companies do not have the full power to set prices, as they still need to concern the maximum prices their customers are willing to pay.
I think nowadays, companies intend to split all the potential customers in one market into different categories in terms of different price levels they are willing to accept. Under such circumstance, the output in the market is the same as the output in a perfectly competitive market; however, all the consumer surplus will be transferred to the supply surplus under a perfect differentiation circumstance. Such phenomenon can increase the costs of their customers and increase the price levels on average.
Therefore, when the market is more specialised and differentiated, the average price level will increases.
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