Real Markets

With the rhetorical overuse of terms like “let the market decide” being used in campaigns and debates I think it would be beneficial to define what real markets look like and when market forces work. Markets are neither magic nor wise. It is a term that describes the cumulative effect of a number of individual decisions made by real individuals.

I currently live in Cleveland where the economy is particularly bad but there is a very real market. The West Side Market has been a place where indicidual vendors come to compete for market share to a very real and identifiable “addressable market.” namely the very real humans that present themselves, cash in hand.

This market has worked very well for a long time because consumers can go there, review a range of choices for the goods they would like to purchase and make individual and relatively well-informed decisions as to which vendor they will use and what price they will pay.

This all works because the consumer who benefits from the purchase has informed choices.  It is very nearly the perfect theoretical market:

  • Choice with frictionless switching
  • Visibility of options
  • Understanding of value by the consumers
  • Feedback from consumers, usually in the form of switching

Lots of consumer goods end up having to make their way in a market with all these attributes, but most “markets” are not so well-formed and lack one or more of these criteria.  There is no “healthcare market” per se because almost no consumer has frictionless choice, visibility of options, understanding of value or any meaningful feedback except perhaps for lawsuits.  0 for 4.

As entrepreneurs, we often try to play against markets to gain at least initial advantage.  We do this because efficient markets drive down price and when you are starting up this is, obviously, undesirable. Once again, we can point to the  healthcare system as an example of what happens when there aren’t sufficient market attributes in place: prices rise uncontrolled.

Being first-to-market with anything can eliminate a couple of those attributes or at least mute them a bit.  Use this advantage to get to a place where you have what you need to compete in a more mature market (like efficient processes, optimized supply chains, or a ton of brand loyalty) – or even better, cannibalize your own market regularly and at a time of your own choosing.

The last bit that I’ll relate here is that markets have, historically, limited how fast things can increase in value.  If something is increasing in value for an extended period of time at better than 15%, you probably have a bubble caused by an inefficient market.

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