What is a Price Maker?
In economics, a price maker is a monopolistic company that can dictate the prices of its goods because there are no substitutes for it. In trading, a price maker is a stockholder who controls a large number of shares and is able to affect the stock's price.
How Does a Price Maker Work?
For example, assume Company XYZ makes a device that can change red streetlights to green. It holds a patent on the technology and no other companies have been able to design competing devices. The "Red Light Green Light" device is priced at $1,000 but costs XYZ only $250 to make (a 75% gross profit margin). Company XYZ only makes 50,000 units per year, but the demand for the device is much higher.
Because there is no competition, and because the profit and demand are so high, Company XYZ is in a position to dictate the price of the device. As a price maker, it can raise the price of the device to $2,000 or even more as long as the demand for the device holds. It is important to note, however, that doing so may cause Company XYZ to break American antitrust laws.
Why Does a Price Maker Matter?
Price makers are also profit makers, because they will only make more product if it's profitable to do so. Investors who can identify price makers have also identified steady profit producers. Price makers also tend to be leaders in their industries.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Buying a second home before selling the first is a scary proposition. But some move-up buyers living in tight real estate markets have little choice if they want to...Read More →
Four states are teetering on the edge of failure. These four states make up over 25% of the United States' GDP...Read More →
Looking to get a little more bang for your saved buck? Depositing your hard-earned dollars in an online bank might be worth a long look if you're seeking higher yields. Today, many of the...Read More →