4 Kinds of Markets
How can I have 4 kinds of market? First, I divided the supplier's group into two parts according to the potential scale of competition. For products easy to be made, like a song, their production scale is usually very small, which also results in a large number of triers and an intense competition. On the contrary, products with complicated producing process and usually also a high fixed cost have a large producing process, which built a high barriers of entry that reduce the number of competitors. Then, I divided the demands' groups, also into two parts, according to their potential scale of demand. Information goods such as games can be widely demanded since they have higher order on most people's preference list; whereas, the demand of software that focuses only on some groups, for example, kid's education, will be more elastically, which can result in a very narrow demand. Thus, we have table 1:
Table 1
Scale
of Producers
|
Number
of Participants
|
|||
Small
|
Large
|
|||
Scale
of Demand
|
Wide
|
“Music”
|
“Operating System”
|
Many
|
Narrow
|
“Ads”
|
“Custom Made”
|
Scarce
|
|
Number of
Participants
|
Many
|
Scarce
|
||
4 zones are formed in this table. First is small-wide zone. Both supply and demand can be plenty, the large number of participants in both sides helps the small-wide zone to become a competitive market. A typical product in this zone is a piece of pop music. Next, production becomes scarce and the scale gets large due to the limitation of a single person’s ability and the huge power of group cooperation. A barrier of entry that limits competition was formed, which can also be fortified by the complexity of the product itself since it causes users a great learning cost which lock consumers in (rf. Varian lock-in). So obviously, large-wide zone is a good place for monopoly and oligopolies. Then, if demands instead of production become less, we will switch to the small-narrow zone. Advertisement is a good example of products in this zone. Finally, when both supply and demands are small, we will enter the large-narrow zone. A customized made software belongs to this zone. This zone is proper for negotiation and investigating because of a relatively low transaction cost due to small market size.
DeLong and Froomkin(1999) concluded 3 basic features of property and exchange that makes the invisible hand a powerful social mechanism: excludability, rivalry, and transparency, which corresponds to the three basic economics assumptions in Adam Smith’s system: scarcity, individual rationality, and perfect information set. But information good, as a good whose value is contained in the information itself, cannot be transparent. Furthermore, Varian(1995) points out that information goods have such perfect copies that they can be created and distributed almost costless. This physical attribute gives information important economics features: non-excludability and non-rivalry, which violates the first two features that guarantee Adam Smith’s sysem.Worse, costless copy also make the marginal cost pricing system crash.
Since we have four different kinds of market and each with unique attributes, in the next article, I will try to put these special attributes: non-excludability, non-rivalry, and non-transparency, into them separately, and see what will happen.
See you.
References
The Economics of Information Technology, Varian, Hal R., J. Farrell, C. Shapiro, 2004, ISBN: 0521844150
Speculative Microeconomics for Tomorrow's Economy, J. B. DeLong, A. M. Froomkin, 1999, presented at Brian Kahin and Hal Varian's January 1997 Harvard Kennedy School conference
Free: The Future of Radical Price, Anderson, C., 2010, ISBN: 9781410322908
Copying and copyright, Varian, Hal R., The Journal of Economic Perspectives, Vol.19, No.2, Spring, 2005
Pricing Information Goods. Varian, H., Proceedings of Scholarship in the New Information Environment Symposium. Harvard Law School. 1995.
Towards a theory of property rights, Harold Demsetz, The American Economic Review, Vol. 57, No. 2,May, 1967, pp. 347-359.