Inderscience Publishers

Markets, prices and market power

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Numerous celebrated economists have pointed to the discipline's failure to adequately explain markets and how prices are formed. This paper addresses that deficiency. It considers the basic function of a market, defined as to coordinate the supply of a product with demand via movements in price. It examines how this operates in actual markets, arguing that price is essentially arbitrary: there is no 'natural' price or general price equilibrium. Price formation results from actual or implicit negotiations between the supply and demand sides, and relies on their negotiating strengths – relative market power. When prices change in as complex a social setting as a market, even a so-called 'perfect' market, some participant must possess sufficient power to make them do so. Locally, a market which at the national level might appear close to 'perfect' will not seem so at all: some traders will be economically stronger than others and push prices in the direction they desire. Cumulatively, this will make prices on the national market change too. Analyses of specific markets have also uncovered complex social and political relationships. The author sets this discussion in the context of the historical development of economics, including its relationship with Newtonian science.

Keywords: general equilibrium, markets, market power, natural prices, perfect competition, pricing, price formation, Newtonian science, economics development

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