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.
