What is a Market?
Markets consist of buyers and sellers of a commodity. Exchanges between buyers and sellers may not all take place in one location. For example, the retail "market for apples" consists of the many stores that sell apples and the consumers that buy those apples.
Although markets are fundamental to economics and economies, many people misunderstand them. For example, students commonly make the mistake of thinking that a "supermarket" is a market. But a supermarket is a retailer. It is only one supplier of many products, while a market is the total of all suppliers and consumers of one product.
Examples of Markets
- The stock market
- The gold market
- The used car market
- The marriage market
- The job market
- The market for news
What Dating can Teach Us About Markets
Note that a place where singles go to meet is sometimes [perjoratively] called a "meat market." We don't like to think of dating as analogous to buying and selling meat, but from an economic perspective there are important similarities. A meat market consists of suppliers who have meat and people who want meat. Dating consist of people who are looking for romance (or company or sex) and people willing to provide it. In markets and in dating it takes two to tango.
While markets can be distributed, they are sometimes centralized. For example, the New York Stock Exchange is a marketplace for stocks. Buyers and sellers meet there to exchange stocks.
Why do Marketplaces Exist?
Marketplaces economize on search costs. If you are shopping for clothes, it saves time to go to one place where there are many clothes stores. Marketplaces also benefit from the network effect: the more stores there are, the more customers they will attract, which means still more stores will want to go there.
Marketplaces have existed for centuries. In medieval Europe people would travel hundreds of miles to a trade fair to buy a year’s provisions.
Daniel Dafoe visited the annual Sturbridge fair in 1723 (500 years after it started). He found a half mile square field full of “goldsmiths, toy shops, braziers, turners, milliners, haberdashers, hatters, mercers, drapers…all the trades that can be named in London.” He wondered “why this fair should be thus, of all other places in England, the center of that trade; and of so great a quantity of so bulky a commodity to be carried thither so far.” The answer is increasing returns. The bigger the marketplace, the greater the benefit of being a part of it, causing still more people to want to go, making it even bigger, and so on…
Increasing returns explain why some nightclubs and bars are "hot" and some are not. If a place is known as the haunt of the beautiful people, other beautiful people will want to go there, making still more beautiful people interested in going there… and so on.
Success Factors for Marketplaces
Marketplaces have to attract both buyers and sellers.
Business Models for Marketplaces
Marketplaces are often businesses. They can make money by charging a commission on each trade, as do stock exchanges and auction houses. They can charge for admission, like some dating sites or nightclubs. They can also make money from advertising; for example, convention organizers make money not only by selling space to exhibitors, but also by selling advertising space to people who want to reach buyers or sellers.
Marketplaces can be very profitable if the network effect is strong enough that there are no major competitors.
The internet allows buyers and sellers to meet online. These marketplaces are commonly called "online markets."