Market Taxonomy PDF

**Chapter 3: Market Taxonomy** The problem of scarcity can be alleviated if individuals are willing to specialize according to their comparative advantages and then find a way to allocate goods and services that is mutually beneficial. This process (specialiazation according to comparative advanta...

**Chapter 3: Market Taxonomy** The problem of scarcity can be alleviated if individuals are willing to specialize according to their comparative advantages and then find a way to allocate goods and services that is mutually beneficial. This process (specialiazation according to comparative advantage) requires an adequate institutional frame, e.g. a market (a framework that allows potential buyers and sellers to exchange goods, services, and information), the market therefore fosters specialization and exchange. In order to make the exchange + transactions possible a market relies on private property rights and contract law. [Property rights] [define individual spheres of control over objects and they allow individuals to determine in which ways these objects shall be used and thus create a distinction between "yours" and "mine"]. Property rights can be absolute, however, restrictions may occur if some uses impede on the well-being of others or are in conflict with moral values. An important example of objects for which many countries have constrained the rights of the owner is the ownership of land. Therefore, it is more adequate to think of property rights as those user rights that society leaves to the formal owner, called residual control rights. Digression 3.1, Property rights enforcement - Important distinction of property rights, mutual recognition vs. enforcement - The modern state has monopolized the legitimate use of force, Weber - Lex Mercatoria - helped overcome the limited possibilities of centralized law enforcement in a politically fragmented europe. - Key factor in economic success - The legal system was privately produced, privately adjudicated and privately enforced - Medieval europe looks similar to today's globalized world. Multinational frims confronted by national agencies but no centrazalized agency exists The fact that markets rely on property rights implies that every transaction on a market has a physical and a legal side. [The physical side] of a transaction is the exchange of goods, [Legal side], a transaction is the exchange of rights. [An exchange of rights] is specified in a contract and the rules that apply to the establishment of such contracts are specified in a society's contract law. There exists a close relationship between the legal and economic aspects in a market. The civil law of a society implicitly defines the extent to which markets can develop and what they can achieve, while the economic analysis of the functioning of markets can inform the legal scholar about the likely consequences of legal rules. [Digression 3.2 Self-Ownership ] - Excludes serfdom and slavery - Self-ownership makes labour contracts possible and prevents people from voluntarily selling themselves into slavery. There are two ways to establish trade. In a barter economy, goods and services are exchanged for other goods and services. Most modern societies rely on an abstract medium of exchange: money. [Digression 3.3 Money] - Traditionally regarded as having three functions: it acts as a medium of exchange, a unit of accounting, and a means of storing value. - Use of money facilitates exchange in comparison wth a barter economy(no longer depends on coincidence) - Money has no intrinsic value. Abstract unit of exchange - The value from money results from social conventions. - Money only has value if both parties in the transaction agree that it has value. Notions of buyer and seller: Buyer: a person who is willing to acquire residual rights of control from another person, in exchange for a given price. Seller: vice.versa With money this is the idea: One person(Buyer) acquire control rights the other gives up control rights ( seller) over future consumption(money) **Taxonomy of market structures** ------------- ---------------------- --------------------- ----------- **Buyers** **Sellers** One Few Many One bilateral monopoly restricted monopoly monopoly Few restricted monopsony bilateral oligopoly oligopoly Many monopsony oligopsony polypoly ------------- ---------------------- --------------------- ----------- **Market Power** Market power means the ability for the buyer/seller to influence the market price, in the case of the third column buyers have 0 Market power. **Polypoly** A polypoly has many buyers and sellers of a homogenous good or service. Goods or services from different suppliers are called homogenous if the potential buyers are not willing or able to distinguish between them, and therefore consider them as perfectly interchangeable. Each buyer or seller considers her influence in the market so negligible that she does not have any influence on the market price: they are price-takers, and the market is perfectly competitive. A market with perfect competition is the workhorse model for a lot of problems analyzed by economists, ranging from the determination of market prices to the effects of taxes and to the determinants of international trade. This is because its simplicity allows one to understand fundamental properties of market transactions. Examples are - some agrarian resources, like wheat - the stock exchange - however some institutional investors can generally influence prices **Monopolistic market** Here, the monopoly is the only seller of a specific good or service, which gives her a certain power to influence prices. Example: Before Russia, Canada and Australia emerged as distributors of diamonds, De Beers had a monopoly in raw diamonds. **Oligopolistic market** This is a market with only a few suppliers selling homogenous goods, each of them having some control over the prices. However, they have to take their competitors' likely behavior into consideration: they are strategically interdependent. Example: grocery market in Switzerland (coop & migros), wireless telephone services in Switzerland (Swisscom, sunrise, salt). Monopsonistic and oligopsonistic markets are mirror images of monopolistic and oligopolistic markets and the main insights of the latter can be applied to the former. **Bilateral monopoly** Both sides of the market possess some market power, which derives from the fact that the trading partner cannot fall back on some other identical alternative if trade does not take place. This is because manufacturers and suppliers often customize their production processes and products to the needs of their trading partner, with the result that the manufacturer cannot sell the tailored products at the same price to other trading partners. Examples are: - highly specialised scientists and their employers (pharmaceutical companies) - governments and some of their defense contractors (US and Huntington Ingalls Industries in the market for nuclear-powered aircraft carriers) Bilateral oligopoly, restricted monopoly and restricted monopsony are far less studies and show how varying degrees of competitiveness influence the bargaining power of a single buyer or seller. **Monopolistic competition** In this market, there are many firms producing similar but not identical products. Example: SUV market **How to determine market structures?** Economists usually distinguish between markets and industries. An industry is a sector of the economy that produces a specific type of good; it is better characterized by the technological way of production that summarises the physical, biological and chemical laws that convert the resources between inputs and outputs. This is also called the technology of production. Market structures are not completely arbitrary, but depend on the technology of production, the perception of goods and services by customers, and the legal framework. The perception of goods and services by the buyers has a direct impact on the market structure. If they can, or are willing to distinguish between, say, red wine and white wine, then all the producers of red wine are in the same market for red wine. If the customers however distinguish between different types of grapes, region of origin, producer, or characteristics of the vineyard, then the market for red wine explodes into a plethora of differentiated markets, where even small local producers may have the market power to influence prices. The legal framework also works in determining the market structures. Most countries have a competition law, to guarantee a minimum degree of competitiveness on each market, thereby excluding monopolies. However, the opposite can be true as well: patent law, for example, grants the patent holder a temporarily restricted monopoly for those products that can be developed from his patent.