A gigantic clock, to which every bidder is wired, dominates the front of each auction hall. As each lot of flowers is towed by, the clock’s hand starts at a high price and rotates through lower prices until one of the bidders stops it with a push of a button. Computers then automatically organize the flowers’ delivery to the buyer’s address. (Location 79)
On November 9, 1989, the people of Berlin joyously tore down the wall that for thirty years had divided their city. As the wall fell, so did communism and the planned economy. On April 30, 1995, the U.S. government ceased controlling the internet. As entrepreneurs devised procedures for online buying and selling, electronic commerce burgeoned. These two dates denote the beginnings of what has become, for good or for ill, the age of the market. (Location 84)
A definition of a market transaction, then, is an exchange that is voluntary: each party can veto it, and (subject to the rules of the marketplace) each freely agrees to the terms. A market is a forum for carrying out such exchanges. (Location 127)
Three categories of nonmarket activity are prevalent. One is unpaid work inside households, such as care-giving, housework, and preparing food for the family. The economic value of home labor is hard to assess, but the average full-time homemaker in the United States, by one estimate, produces outputs that if priced would be worth about $17,000 per year.5 Government activities such as building roads and supplying schools and the police force make up another nonmarket category. Government consumption (which means all government activities other than transferring money between people) amounts to a fifth or more of national income in modern economies. The business taking place inside firms is yet another major nonmarket category. In the United States and similar economies, more transactions occur within firms than through markets. (Location 134)
Supply and demand bypasses questions of how buyers and sellers get together, what other dealings they have, how buyers evaluate what they are buying, and how agreements are enforced. (Location 172)
A workable market design keeps in check transaction costs—the various frictions in the process of making exchanges. These costs include the time, effort, and money spent in the process of doing business—both those incurred by the buyer in addition to the actual price paid, and those incurred by the seller in making the sale.11 Transaction costs are many and varied. (Location 190)
Bargainers sometimes overreach in trying to squeeze out a good bargain, causing an impasse and spoiling what could have been a mutually beneficial deal. (Location 196)
Markets generate gains from trade; one of the most important observations in all of economics is that buying and selling creates value. The Rwandan refugees focused their labor. Some scavenged meat, others grew vegetables; some gathered firewood, others worked as tailors or cooks. Then they traded what they produced. In the prison camp, nonsmokers sold cigarettes to buy food, while vegetarian Indians exchanged canned beef for jam and margarine. The ability to trade meant the refugees and prisoners were better off than if, like Robinson Crusoe, they could consume only their own allocations. (Location 317)
Engels was not enamored of the reinventing of markets, of course, but it is inexorable. Potential gains are missed if a transaction cost of some kind impedes buying and selling, so there is a profit opportunity in finding a way to lower that cost. (Location 421)
Benefiting both buyer and seller, any transaction creates value. (Since either party can veto the deal, it must be making both of them better off, in their own eyes, than not trading.) (Location 503)
The U.S. government’s expenditure on health-related research via the National Institutes of Health (NIH) and other federal agencies totaled 18billionin2000.Universities,foundations,andcharitiesspentanother10 billion or so. These amounts add up to more than the research spending of all the U.S. pharmaceutical companies, which was $22.5 billion. Most of the major new drug patents awarded to the drug companies have their origins in government-funded research. Of the key discoveries cited in biomedical patents, just 17 percent came from industry, according to a study by the National Science Foundation. Much of the work that showed the effectiveness of AIDS antiretrovirals, for example, was done by the NIH and other public laboratories. (Location 628)
plan. A study of the U.S. market for antiulcer drugs, in which four manufacturers competed, estimated that a 10 percent increase in price would have been followed by only a 7 percent decrease in demand.16 This means (if you do the arithmetic) that an increase in the price would elicit an increase in the total revenue earned, implying that had there been a single supplier, as in many other pharmaceutical markets, the price would have been set much higher. (Location 655)
A successful market has mechanisms that hold down the costs of transacting that come from the dispersion of information. (Location 823)
The price per chassis agreed at the outset covered your investment costs. Now the car maker, knowing your retooled machines are not usable for anything else, might demand the price be lowered. If the new price covers your operating costs (but not your retooling), it is in your interest to accept the new price rather than have the machinery sit idle. (Location 1172)
The newly cooperative relationships improved quality and lowered costs. Tom Stallkamp, a purchasing manager at Chrysler, speaking of the early 1990s, said, “For the first time in our history, we were cordially exchanging ideas with our suppliers on how to make our companies more productive.” (Location 1192)
As a purchasing manager said, if an issue comes up, you telephone your counterpart “and deal with the problem. You don’t read legalistic clauses at each other if you ever want to do business again.” (Location 1201)
“I paid too much for it,” the movie director Sam Goldwyn once remarked, “but it’s worth it.” When buyers are savvy, prices measure value. (Location 1353)
The surest route to a competitive market is the arrival of new firms. (Location 1356)
As well as aiding license packaging, the ascending auction allowed bidders to respond to each others’ bids, diminishing the winner’s curse (the tendency for unthinking bidders to bid the price up beyond actual value). (Location 1571)
Back in the United States, the auctions’ success did not do away with the government’s penchant for giving away what the public owns, as Congress voted to give spectrum for high-definition broadcasting to the television networks. The television industry holds far more sway over the politicians than the telecommunications industry, evidently, (Location 1594)
To take advantage of the market’s ability to combine scattered information, Plott designed an electronic asset market. There are tradeable certificates saying something like “September, 1501–1600,” meaning that if September sales turn out to be between 1501 and 1600 units, the bearer is paid one dollar. The certificates range over the possible sales totals. Some months ahead, the company gives each salesperson twenty certificates for each sales interval, and lets them trade among themselves. Anyone who predicts sales will be high buys the high-sales certificates, driving their price up, and sells the low-sales certificates, pushing their price down. The price of any given certificate, when the market settles down, reflects the salespeople’s collective beliefs about the likelihood of the corresponding sales level. These prices predict sales, Plott reported, better than the company’s standard forecasting techniques.17 (Location 1643)
