Perfect markets and some Right Myths


Have no fear of perfection, you’ll never reach it.

Salvador Dali

In my last post I talked about the beauties of supply and demand, and the assumptions of the perfect information conditions.

Perfect information conditions allow perfect market conditions, where all the economic law is observed and free trade, fair trade and globalization are candles in the cake. The myth of the right that I want to talk today is the existence of perfect information and perfect market conditions. We established that when perfect information exists, the market knows:

  • All consumers and producers know all things.
  • About all products.
  • At all times.

Yeah, right!

Or not?

There are cases where perfect information and perfect markets exists! The condition is that information needs to be available for all the products and all the time. Information Technology plays a great role to allow these conditions.

Information can be defined as data that is sorted in a recognizable pattern that is current, relevant, and true to a specific subject. Wherever IT can bring information that fills up this description, then we can have perfect information conditions. There is a market where we can say perfect market condition exists: eBay.

We can give a perfect example: eBay has a starting price that can be set as low as one cent. The bigger the starting price, the bigger the fee that the seller has to pay to eBay. What to do when you have a very valuable object in order to minimize fees? You can trust the market and set the price to one cent. Let’s say you have a Mexican 50 pesos gold coin known as “Centenario”. The coin has 1.2 ounces of pure gold, and, for the time this was written, the value was about us$720. Look at this auction history and how, in a matter of hours, from a starting point of one cent, the market set the real price. Look at the dance of the market:

$0.14 04-Sep-06 16:09:00
$0.50 04-Sep-06 16:09:55
$0.80 04-Sep-06 16:10:11
$2.00 04-Sep-06 16:10:25
$4.00 04-Sep-06 16:10:41
$6.00 04-Sep-06 16:10:59
$7.00 04-Sep-06 16:11:14
$8.00 04-Sep-06 16:11:26
$10.00 04-Sep-06 16:11:37
$12.00 04-Sep-06 16:11:53
$14.00 04-Sep-06 16:12:08
$18.00 04-Sep-06 16:12:26
$20.00 04-Sep-06 16:12:39
$22.00 04-Sep-06 16:12:59
$24.00 04-Sep-06 16:42:28
$26.00 04-Sep-06 16:42:58
$600.00 04-Sep-06 19:51:40
$680.00 04-Sep-06 19:52:16
$700.00 04-Sep-06 16:05:09
$720.00 04-Sep-06 19:53:39

Notice the sharp increment from $26 to $600 in only one step. By contrast, some smart guy wanted, at the same time, $1,250 for the same coin in the same conditions. After one week, zero bids were posted and the coin went unsold. That is information technology serving sellers and buyers to reach the best price and moving those with wrong expectations out of the game.

According to Wannacot and Wannacot, markets with a lot of buyers and a lot of sellers are perfect markets, because nobody has enough power to influence in the price. They quote the wheat market as an example of perfect market conditions. We’ll come back to that later and in the following postings. The important idea, for now, is understand that in perfect market conditions, nobody has any special power for influencing in the prices, and we may expect to have perfect market conditions in places where there are a lot of players in both sides and information is readily available.

I heard this one before!

There are two immediate market imperfections: Monopolies and oligopolies. We can dabble here for pages about these two but I am sure you all are pretty familiar. The point is that in those conditions the seller, the supply, has enough power to influence the market. Of course, the demand curve is a limitation, but as elasticity is lower, the range of influence on price is higher, like in the energy or communications sectors.

There are at least four more market imperfections that I have found in my studies, let’s talk about agricultural products, for instance:

 

  • Several industrialized countries, like USA and France, have strong subsides to the agricultural industry that poorer countries cannot afford. When dealing between unequal economies, these subsidies lay a competitive advantage for the producers of the industrialised country. Many people is critical on free trade in general because there is the hypocrite position of developed countries of using protectionism against poor countries while requiring them to leave their own producers without protection.[1]

 

  • Industrialised countries are larger economies than non-industrialized. Instead of the supply and demand setting the price, it is the demand that set the price and put the producers to compete between them, especially with some produce like coffee where there is a large surplus of it. There is not such thing as a cartel for produce where the producer countries can try to have influence over the final price[2].

  • The fluctuation of commodity prices doesn’t guarantee a living wage for many producers, forcing them into debt and poverty[3].

  • The fluctuation of the currency between first world countries and underdeveloped and developing ones often alters the price of the product in an unnatural way. The dollar fluctuates between 10 and 15 percent annually in the major currencies around the world[4]. Some countries still suffer hyperinflation, massive currency devaluation and government policies that disrupt the economy and exchange rates[5].

In the 1980’s, the US government policy provided $260 billions to American Farmers[6]. In 2008, the final NAFTA protections to Mexican bean and corn will fall, leaving poor Mexican farmers alone against the most subsidized farmer economy in the world.[7]

So that is why, perfect market conditions are a Right myth.


[1] The U.S. government spent $2 billion in 1986 to flood international markets with American rice, driving down the world rice price by 50 percent. The Thai rice program spent less than $100 for each Thai rice grower, while the U.S. program spent the equivalent of over $l million for each full-time American rice grower between 1985 and 1990. Thailand’s average per capita income is $860, while the average American full-time rice grower was a millionaire even before receiving lavish subsidies in the mid and late 1980s.

[2] “Why Fair Trade?” Paul Rice, TransFair USA, video conference held on March 2006. Available on http://www.big-picture.tv

[3] http://www.fairtrade.org.uk/about_what_is_fairtrade.htm, retrieved on April 2006.

[4] Washington lawyer David Palmeter observes: “In the U.S., exchange rates in anti-dumping proceedings are determined by applying an outdated regulation, a relic of an era that ended in the early 1970s when the fixed exchange rate system established at Bretton Woods was abandoned. . . . The rate established by the Federal Reserve is a quarterly one, set in advance, and based on transactions at the end of the previous quarter. . . . This average rate is used throughout the quarter unless, on any particular day, it varies from the average by more than five percent, in which case the daily rate is used.” N. David Palmeter, “Exchange Rates and Anti-dumping Determinations,” Journal of World Trade 22, no. 2 (1988): 73.

[5] The depreciation of the Brazilian real from 1.20 to the dollar in January 1999 to 3.60 as of January 2003 has caused Brazilian costs in dollar-denominated terms to fall markedly.

[6] “The Politics of Plun der”, Doug Bandow, New Brunswick, N.J.: Transaction Books, 1990.

[7] “Los Idus de Julio”, Carlos Fuentes, El Norte, Jul. 21, 2006.

 

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4 Responses to Perfect markets and some Right Myths

  1. Ive read through your three posts so far, and must say I’ve found them rather interesting (I did a minor in econ back in college and a major in Poli Sci)

  2. Jorge says:

    Nice post. A concept that deals with many of these market imperfections is “social capital”: An individual has more social capital if she has more useful connections which will pass on key information to her at the right time, leading her to act and reap personal benefits before the rest of the market can.

  3. Florian says:

    Hi,
    I found your blog via google by accident and have to admit that youve a really interesting blog 🙂
    Just saved your feed in my reader, have a nice day 🙂

  4. With havin so much content and articles do you ever run into any issues of plagorism or copyright infringement?
    My blog has a lot of completely unique content I’ve either authored myself or outsourced but it looks like a lot of it is popping it up all over the internet without my permission. Do you know any methods to help protect against content from being ripped off? I’d genuinely appreciate it.

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