What Makes A Market?

Posted: Sep 21, 2012 12:01 AM

Markets are in everything. It’s something that Mark Perry refers to in his blog frequently. People fail to understand markets. They think grossly about them as a place where commerce happens. Or, their minds drift to trading floors where the “markets” trade.

But there are truly markets in everything. Humans respond to incentives.

Even in base case mundane tasks, humans will respond and try to do whatever they are doing in the most efficient way possible. I was in a discussion about a software company with some people. We were analyzing the way it worked, features and advantages and it occurred to me. Even with a mundane task like email, shouldn’t the software company view that task as a market? If it did, it would create the right incentives for people to use it.

Fred Wilson wrote about Return Path the other day. It’s one of his portfolio companies that does B2B analysis with email. They are creating a market based incentive for stimulus and response that can be analyzed and acted upon. Engag.io is another company that is creating an individualized marketplace for interaction. It makes social media more efficient.

Every single day, you intuitively analyze markets in every decision you make. Some of those decisions become routines-because they simply are the most efficient way for you to accomplish something that you have figured out up to that point. Instead of money being a constraint, generally these market constraints are time and interactions with other people.

Decentralized markets work much more efficiently and allocate resources better than centralized markets. That’s why big government programs always fail. It’s a one size solution for all. Much better to have less central planning and less command and control. Put power in the hands of individuals to make decisions and act in their own self interest. Whatever decision they make for themselves is the best for everyone. Realizing that there are markets in everything would be a huge wake up call for governments. We would get better regulations and laws-with more prosperity for everyone.

Even your morning routine of getting out of bed and how you handle getting yourself ready and out the door for your day can be construed as a market making activity. You make choices and have preferences. Once you do that, you create a market.