Characteristics of price-taker markets Firms in the market will be price-takers when the following conditions are met: 1. All firms in the market produce an identical product. 2. A large number of firms (buyers and sellers) exist in the market so that no single firm dominates the market. 3. Each firm supplies only a very small portion of total output supplied to the market. 4. No barriers limit entry into or exit from the market, and firms and resources are fully mobile. Use the dropdown menus in the following table to identify whether each of the following scenarios describes a competitive price-taker market, along with the correct explanation of why or why not. Price-Taker Market? Scenario The government has granted t
he U.S. Postal Service the exclusive right to deliver mail. A few major airlines account for the vast majority of air travel . Consumers view all airlines as providing basically the same service and will shop around for the lowest price. There are hundreds of colleges that serve millions of students each year. The colleges vary by location, size, and educational quality, which allows students with diverse preferences to find schools that match their needs. There are hundreds of high school students in need of algebra tutoring services in San Francisco. Dozens of companies offer tutoring services, and the parents who seek out tutors view the quality of the tutoring at the different companies to be largely the same.
The Correct Answer and Explanation is :
To identify whether each of the following scenarios describes a competitive price-taker market, let’s first review the characteristics of a price-taker market:
- All firms produce identical products.
- A large number of firms exists in the market, and no single firm can dominate the market.
- Each firm supplies only a small portion of the total market output.
- There are no barriers to entry or exit, and resources are fully mobile.
Now, let’s analyze the scenarios:
1. The government has granted the U.S. Postal Service the exclusive right to deliver mail.
- Price-Taker Market? No
- Explanation: The U.S. Postal Service has a government-granted monopoly, meaning no competition exists in this market. Since there is no entry or exit allowed for other firms and the service is exclusive, the Postal Service is a price maker, not a price taker.
2. A few major airlines account for the vast majority of air travel.
- Price-Taker Market? No
- Explanation: The airline industry is an oligopoly where only a few firms dominate the market. These airlines control a large portion of the market, allowing them to influence prices. Therefore, airlines are not price takers, as they can adjust their pricing based on their market share and competition.
3. Consumers view all airlines as providing basically the same service and will shop around for the lowest price.
- Price-Taker Market? Yes
- Explanation: This scenario describes perfect competition in the airline industry (at least from a consumer’s perspective). If consumers view all airlines as offering identical services, they will be price-sensitive, forcing airlines to accept the market price. While the few major airlines still dominate, if the service is truly identical, the pricing would behave more like a competitive market.
4. There are hundreds of colleges that serve millions of students each year. The colleges vary by location, size, and educational quality, which allows students with diverse preferences to find schools that match their needs.
- Price-Taker Market? No
- Explanation: While there are many colleges, they offer differentiated services (i.e., different quality of education, size, etc.). This differentiation allows colleges to set their prices rather than being price takers. The market is more competitive but not perfectly competitive because of the variation in offerings.
5. There are hundreds of high school students in need of algebra tutoring services in San Francisco. Dozens of companies offer tutoring services, and the parents who seek out tutors view the quality of the tutoring at the different companies to be largely the same.
- Price-Taker Market? Yes
- Explanation: In this scenario, the tutoring services are essentially identical in the eyes of consumers, and there are many firms in the market. This leads to price competition, meaning firms are price takers because no single firm can influence the price significantly.
Let me now generate an image summarizing this analysis.
Here is the image summarizing the analysis of the different market scenarios and their characteristics regarding price-taker markets. Let me know if you need any further explanation!
