Economists love to talk about markets. Listen to them and it sometimes seems that markets are the panacea to all the ills of humanity. Whatever problems we may be facing, the best solution inevitably is deemed to be a market based solution. So here is a question that quite naturally arises: what are markets? For most people, we think we know. But do we really?
Mention the word market and the image that jumps to mind is a bucolic rural scene filled with small shops selling different things to throngs of happy people buying stuff they need. This image is reinforced for most of us by our memories of Economics 101 where we learn about perfect competition. However, markets like this do not really exist any more. Over time markets have mutated into many different forms each with their own characteristics. This has happened to such an extent that talking about perfect competition is actually a disservice since this reinforces the myth that the conditions that apply to perfectly competitive markets also apply to these other forms of markets.
Perfectly competitive markets only exist if we make a number of assumptions. Some of the most important assumptions underlying these markets are:
- Buyers and sellers have equal information regarding the good or service being sold.
- There is no cost to gathering and assimilating information regarding the good or service being sold.
- No single seller or buyer has the power to affect the functioning of the market.
- There are no entry or exit barriers.
- An efficient legal and regulatory framework exists for enforcing contracts.
- There is a minimum (ideally no) time lag between some new information becoming available and that information being assimilated and acted upon.
- The same forces (primarily supply and demand) act in the same fashion on all commodities.
- All the actors in the market are economically rational.
- Also all actors in the market are able to instantly calculate the amount of "utility" that they will obtain from buying an extra unit of a particular commodity (whether a good or a service).
Needless to say, there are no markets in the real world where such conditions exist. The reason why perfectly competitive markets are studied is that they serve as a good model to understand how an "ideal" market should work; the idea being that lessons learned in a study of this type of market can then be applied to other, more realistic markets. The problem is that most of the important assumptions that underlie perfectly competitive markets are then also implicitly assumed for these other types in more or less their original form. This results in the wrong kind of lessons being drawn. These wrong lessons are transmitted to students, especially business students and eventually percolate to policy makers where they influence policies that can result in actual harm as we have recently seen.
What are these other kinds of markets? To what extent the assumptions stated above hold in these other types? What are the actual characteristics of these other types? These are some of the questions regarding markets that I will be exploring in subsequent pots.
Posts
No comments:
Post a Comment