Economics is the study of markets under a particular set of assumptions.
Consider the perfect market – complete, perfect information, free entry, prices adjust to clear the market, a single price emerges. Teaching the foundations of this model is more easily done by appealing to real life situations where perfect markets exist. One classic example is the traditional town square fresh produce markets. Consumers can easily examine the quality of the tomatoes at each stall, and since the goods are perishable, prices will adjust to clear the market at the end of the day or week (or close to it).
Even this most basic example is wrong. In real life, in real produce markets, prices for homogeneous goods can be very dispersed. Clientelisation is common – buyers and sellers become loyal to each other.
A fundamental problem with the basic model is that it treats a single market exchange in isolation. Once you have repeated exchanges, non-price factors become important. Trust and loyalty can be valuable.
When markets generate clientelisation, two outcomes can be observed. In one scenario, the most competitive sellers, whose buyers shop around at many other sellers, charge higher prices than observed between loyal sellers to loyal buyers. This is more likely the case for perishable goods with variable supply, like fresh fish. Sellers have motivation to develop stable buyers who come to them first, so that they can clear all their fish even on a day with large catches.
In other situations, especially durable capital goods, clientelisation can lead to higher prices. Loyal customers pay higher prices because of the trust of the brand, and the associated relationship that develops over the lifetime of the equipment. Sometimes there are explicit contract inclusions, other times the expected behaviour really does result from expectations of loyalty. While this is more common in the commercial sphere, you can see decent examples in consumer markets, like loyal Apple customers in computer markets.
You might argue that the perfect market is just a model, and that it needs to be tweaked to deal with the intricacies of real markets. Add in some market failures. That’s one approach. But not my preferred one because it involves looking for exemptions, reasons the market is not perfect, based on the assumption that perfect markets are a possible outcome. Markets don’t fail to be perfect, they succeed as dynamic system of production.
My preferred approach is to assemble a market model from the ground up. Start with social structures and incentives, then look at what really happens. Take a long-term view that incorporates time, risk, and asset values.
In any case, prices are just one part of an exchange, which is more clear observed when you deal with high-value contracts containing extensive conditions. This is also a problem with land valuation, where you would expect price differences between highly conditional, and unconditional contracts.
No market will be perfect. They will simply deliver rewards to buyers and sellers depending on the social structure they are embedded in. Most will be workably competitive in the sense that producers will choose not to exploit their power to extract ‘abnormal’ profits because of long-run customer loyalties and outside opportunities.
Markets are simply a durable and dynamic social exchange where prices are explicit. They are a social construct that has evolved from primitive notions of reciprocity – a market in favours. Once we drop the perfect market myth we can begin to apply some of the rigorous analytical methods of economics more broadly to social problems.
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