Meeting on Price, value, and market signalling

We had our meeting last night at the Idea Cafe about price and markets.

After the initial introduction of the basis of price, value, and markets, the discussion naturally moved towards the limitations of markets and when the ideal market conditions break down.

To summarize,

Efficient markets are based on the broad assumption of unlimited buyers and unlimited sellers, each with individual demand and supply characteristics.  The competing interests of these buyers and sellers lead to the efficient market equilibrium.

However, these ideal assumptions are only applicable to widely consumed, manufactured, and distributed goods. 

The concept gradually degrades with items that are not exactly identical.  While houses can be compared in terms of area size and location, there are always individual characteristics and timing that skew the ideal.

One of a kind artwork is the extreme of deviation from the ideal market scenario.

It is also important to see market mechanism as a good tool to efficiently distribute resources after other more important goals and limitations have been placed on the market mechanism to make the final choices.

Whether it is human flourishing, safety concerns, ethical issues, and other concerns that are both non monetary and vital to our existence,  these should be the priority for setting our goals rather than supply and demand.  After all, is it not backwards if we consume lots of cheese only because of cheese is abundant and cheap?  Should our health and dietary consideration trump the availability of cheese in the market? 

Only after we set our dietary goals and boundaries such as safety concerns about cheese that is fit for consumption should we then look to the market to help us choose. 

We also discuss speculation of price trends.  Farmers are helped by speculators who guarantee the price of their harvest so that the farmers know what to grow at planting time. 

What about the condo buyer who is buying expecting the condo to appreciate in value?  Is this buyer reserving the unit for someone later who wants that condo at a higher price?

The group did not think it was bad for the individual condo speculator to buy expecting a price rise, even if the collective action of condo buyers doing the same thing will cause a bubble.  The principle seems to be whether the speculator is individually trying to corner or manipulate the market in some way.

Similarly, in an emergency situation where price of emergency supplies goes up.  Is this price gouging or just putting more incentive in the market for entrepreneurs to pay expensive air freight to get more emergency supplies to the needed location?  Here again, the efficient market model fails because the price change is due to a limitation of the supply.  While higher prices will stimulate more supply,  the timing and emergency demand skew the market out of normal operating range. 

Rafi suggested that in these cases, prices should be allow to go up but only to a limit.  But how high a limit and who sets the limit?

Efficient markets also assumes frictionless information transfer so that all buyers and sellers know about prices levels all the time.  This is another assumption that can never be achieved.  In emergency and stressed positions, information is nonexistent.

The worst behavior is market manipulation and sequestration; trying to limit the market in some way for individual profit.

The discussion also drift into happiness as a motivational basis behind economics and the need for human creativity as another motivation.  More material for another cafe!