Market (economics)


In economics, a market is a composition of systems, institutions, procedures, social relations or infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services to buyers in exchange for money. It can be said that a market is the process by which the value of goods and services are established. Markets facilitate trade and enable the distribution and allocation of resources in a society. Markets allow any tradeable item to be evaluated and priced. A market emerges more or less spontaneously or may be constructed deliberately by human interaction in order to enable the exchange of rights of services and goods. Markets generally supplant gift economies and are often held in place through rules and customs, such as a booth fee, competitive pricing, and source of goods for sale.
Markets can differ by products or factors sold, product differentiation, place in which exchanges are carried, buyers targeted, duration, selling process, government regulation, taxes, subsidies, minimum wages, price ceilings, legality of exchange, liquidity, intensity of speculation, size, concentration, exchange asymmetry, relative prices, volatility and geographic extension. The geographic boundaries of a market may vary considerably, for example the food market in a single building, the real estate market in a local city, the consumer market in an entire country, or the economy of an international trade bloc where the same rules apply throughout. Markets can also be worldwide, see for example the global diamond trade. National economies can also be classified as developed markets or developing markets.
In mainstream economics, the concept of a market is any structure that allows buyers and sellers to exchange any type of goods, services and information. The exchange of goods or services, with or without money, is a transaction. Market participants or economic agents consist of all the buyers and sellers of a good who influence its price, which is a major topic of study of economics and has given rise to several theories and models concerning the basic market forces of supply and demand. A major topic of debate is how much a given market can be considered to be a "free market", that is free from government intervention. Microeconomics traditionally focuses on the study of market structure and the efficiency of market equilibrium; when the latter is not efficient, then economists say that a market failure has occurred. However, it is not always clear how the allocation of resources can be improved since there is always the possibility of government failure.

Definition

In economics, a market is a coordinating mechanism that uses prices to convey information among economic entities to regulate production and distribution. In his seminal 1937 article "The Nature of the Firm", Ronald Coase wrote: "An economist thinks of the economic system as being coordinated by the price mechanism....in economic theory, we find that the allocation of factors of production between different uses is determined by the price mechanism". Thus the usage of the price mechanism to convey information is the defining feature of the market. This is in contrast to a firm, which as Coase put it, "the distinguishing mark of the firm is the super-session of the price mechanism".
Thus, Firms and Markets are two opposite forms of organizing production; Coase wrote:
There are also other hybrid forms of coordinating mechanisms, in between the hierarchical firm and price-coordinating market.
The reasons for the existence of firms or other forms of co-ordinating mechanisms of production and distribution alongside the market are studied in "The Theory of the Firm" literature, with various complete and incomplete contract theories trying to explain the existence of the firm. Incomplete contract theories that are explicitly based on bounded rationality lead to the costs of writing complete contracts. Such theories include: Transaction Cost Economies by Oliver Williamson and Residual Rights Theory by Groomsman, Hart, and Moore.
The market/firm distinction can be contrasted with the relationship between the agents transacting. While in a market, the relationship is short term and restricted to the contract. In the case of firms and other co-ordinating mechanisms, it is for a longer duration.
In the modern world, much economic activity takes place through fiat and not the market. Lafontaine and Slade estimates, in the US, that the total value added in transactions inside the firms equal the total value added of all market transactions. Similarly, 80% of all World Trade is conducted under Global Value Chains, while 33% is intra-firm trade. Nearly 50% of US imports and 30% of exports take place within firms. While Rajan and Zingales have found that in 43 countries two-thirds of the growth in value added between 1980 and 1990 came from increase in firm size.

Types

A market is one of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers. It can be said that a market is the process by which the prices of goods and services are established. Markets facilitate trade and enable the distribution and allocation of resources in a society. Markets allow any trade-able item to be evaluated and priced. A market sometimes emerges more or less spontaneously or may be constructed deliberately by human interaction in order to enable the exchange of rights of services and goods.
Markets of varying types can spontaneously arise whenever a party has interest in a good or service that some other party can provide. Hence there can be a market for cigarettes in correctional facilities, another for chewing gum in a playground, and yet another for contracts for the future delivery of a commodity. There can be black markets, where a good is exchanged illegally, for example markets for goods under a command economy despite pressure to repress them and virtual markets, such as eBay, in which buyers and sellers do not physically interact during negotiation. A market can be organized as an auction, as a private electronic market, as a commodity wholesale market, as a shopping center, as complex institutions such as international markets and as an informal discussion between two individuals.
Markets vary in form, scale, location and types of participants as well as the types of goods and services traded. The following is a non exhaustive list:

Physical consumer markets

  • Food retail markets: farmers' markets, fish markets, wet markets and grocery stores
  • Retail marketplaces: public markets, market squares, Main Streets, High Streets, bazaars, souqs, night markets, shopping strip malls and shopping malls
  • Big-box stores: supermarkets, hypermarkets and discount stores
  • Ad hoc auction markets: process of buying and selling goods or services by offering them up for bid, taking bids and then selling the item to the highest bidder
  • Used goods markets such as flea markets
  • Temporary markets such as fairs
  • Real estate markets

    Physical business markets

  • Physical wholesale markets: sale of goods or merchandise to retailers; to industrial, commercial, institutional, or other professional business users or to other wholesalers and related subordinated services
  • Markets for intermediate goods used in production of other goods and services
  • Labour markets: where people sell their labour to businesses in exchange for a wage
  • Online auctions and Ad hoc auction markets: process of buying and selling goods or services by offering them up for bid, taking bids and then selling the item to the highest bidder
  • Temporary business markets such as trade fairs
  • Energy markets

    Non-physical markets

  • Media markets : is a region where the population can receive the same television and radio station offerings and may also include other types of media including newspapers and Internet content
  • Internet markets : trading in products or services using computer networks, such as the Internet
  • Artificial markets created by regulation to exchange rights for derivatives that have been designed to ameliorate externalities, such as pollution permits

    Financial markets

s facilitate the exchange of liquid assets. Most investors prefer investing in two markets:
  • The stock markets, for the exchange of shares in corporations
  • The bond markets
There are also:
  • Currency markets are used to trade one currency for another, and are often used for speculation on currency exchange rates
  • The money market is the name for the global market for lending and borrowing
  • Futures markets, where contracts are exchanged regarding the future delivery of goods
  • Insurance markets
  • Debt markets

    Unauthorized and illegal markets

  • Grey markets : is the trade of a commodity through distribution channels which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer
  • markets in illegal goods such as the market for illicit drugs, illegal arms, infringing products, cigarettes sold to minors or untaxed cigarettes, or the private sale of unpasteurized goat milk

    Mechanisms

In economics, a market that runs under laissez-faire policies is called a free market: it is "free" from the government, in the sense that the government makes no attempt to intervene through taxes, subsidies, minimum wages, price ceilings and so on. However, market prices may be distorted by a seller or sellers with monopoly power, or a buyer with monopsony power. Such price distortions can have an adverse effect on market participant's welfare and reduce the efficiency of market outcomes. The relative level of organization and negotiating power of buyers and sellers also markedly affects the functioning of the market.
Markets are a system and systems have structure. The structure of a well-functioning market is defined by the theory of perfect competition. Well-functioning markets of the real world are never perfect, but basic structural characteristics can be approximated for real world markets, for example:
  • Many small buyers and sellers
  • Buyers and sellers have equal access to information
  • Products are comparable
Markets where price negotiations meet equilibrium, but the equilibrium is not efficient are said to experience market failure. Market failures are often associated with time-inconsistent preferences, information asymmetries, non-perfectly competitive markets, principal–agent problems, externalities, or public goods. Among the major negative externalities which can occur as a side effect of production and market exchange, are air pollution and environmental degradation.
There exists a popular thought, especially among economists, that free markets would have a structure of a perfect competition. The logic behind this thought is that market failure is thought to be caused by other exogenic systems, and After eliminating external influences or interventions, often referred to as "exogenic systems," the markets were allowed to operate independently, adhering to the principles of free-market economics. This approach assumes that by removing regulatory barriers, subsidies, or other external controls, the market can function more efficiently. The underlying belief is that such "freed" markets, driven by the forces of supply and demand, can self-regulate and allocate resources optimally, thus preventing or minimizing occurrences of market failures. However, this perspective remains a topic of debate among economists and policymakers, as concepts like the , along with issues such as monopolies, externalities, and information asymmetries, highlight the complexities of market dynamics.
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For a market to be competitive, there must be more than a single buyer or seller. It has been suggested that two people may trade, but it takes at least three persons to have a market so that there is competition in at least one of its two sides. However, competitive markets—as understood in formal economic theory—rely on much larger numbers of both buyers and sellers. A market with a single seller and multiple buyers is a monopoly. A market with a single buyer and multiple sellers is a monopsony. These are "the polar opposites of perfect competition".
As an argument against such logic, there is a second view that suggests that the source of market failures is inside the market system itself, therefore the removal of other interfering systems would not result in markets with a structure of perfect competition. As an analogy, such an argument may suggest that capitalists do not want to enhance the structure of markets, just like a coach of a football team would influence the referees or would break the rules if he could while he is pursuing his target of winning the game. Thus, according to this view, capitalists are not enhancing the balance of their team versus the team of consumer-workers, so the market system needs a "referee" from outside that balances the game. In this second framework, the role of a "referee" of the market system is usually to be given to a democratic government.