Monopolists are price makers. Why is this not the case for firms in a competitive market?

Question:

Monopolists are price makers. Why is this not the case for firms in a competitive market?

Monopoly:

In a market place where customers cannot easily substitute or forego a product or service, a monopoly on that good or service is a price maker. That means that the business can set the price at any level they want to and customers have to pay what they are asking.

Answer and Explanation:

Firms in a competitive market are price takers because their customers can go to competitors if their prices are too high.

When firms compete with one another for business, a firm that is greedy or inefficient may set their prices high, but they cannot rely on customers not to switch to their competitors who gain by undercutting them. This is also true with monopolies provided that customers can easily substitute the good or service they are offering.


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Natural Monopoly in Economics: Definition & Examples

from Intro to Business: Help and Review

Chapter 3 / Lesson 13
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