Markets and Infrastructure
Dr. Kumar Aniket
17 June 2022
Infrastructure
Definition
Market
Kerala Fish Market
Coastal Fish Market in Kerala
Fish is the staple diet in Kerala, India
Kerala has a long coastline with fish markets dotted along the coast
Fisherman have a choice of which markets they want to land their fish in
Information problem after the fisherman catch their fish
They do not know the price of fish in each market on a particular day.
Kerala Fish Market
Jenson (2007) studied of 15 fish markets along the 225 km Northern coast of Kerala to understand whether the market for fish was working
Jensen, Robert (2007). The digital provide: Information (technology), market performance, and welfare in the South Indian fisheries sector.” The quarterly journal of economics.
Kerala Fish Market
Jenson (2007) studied of 15 fish markets along the 225 km Northern coast of Kerala to understand whether the market for fish was working
Fisherman had to choose the port/market where they would get the best price for their catch
Fish merchants bought the fish from the fisherman and sold it to the consumers
If fish merchants already had enough fish on the port they landed, the fisherman would just jettison their catch
Fish prices were high and fisherman’s profits low due to wastage and bargaining power of fish merchants who bought from the fisherman and sold to the consumers
Market Conditions on 14th January 1997 in Fish Markets in Kerala
Badagara: 11 boats jettisoned their catch due to excess supply
Chombala: 15 buyers left unable to purchase fish at any price
Notes
Markets stop working if there is either excess supply or excess demand.
If there is excess supply, the prices drops to zero.
If there is excess demand, the price rises initially but the price of last few transactions don't signify anything once there is no fish left for customers to buy, at any price.
The market clears if the demand and supply are equalised. The price in these markets are above zero and below the price in the markets with excess demand.
Average market price across markets
| Excess supply | Market Clearing | Excess demand |
|---|---|---|
| ₹ 0 | ₹ 5.9 | ₹ 9.3 |
Sequential roll out of mobile phone coverage
Notes
We can see in the previous figure that the mobile phones were rolled out sequentially in the three areas (Region I, II and III) the paper studies. What is striking is the drop in volatility of daily prices as the mobile phones are rolled.
The drop in volatility of price leads to both fisherman (people who supply the fish) and consumers (people who demand the fish) being better off. Consumer price drops and the fisherman's profits increase.
This is because the transaction cost1 in the market has decreased. In the fish market, the cost of acquiring information was a large part of the the transaction cost. The transaction cost dropped because of the introduction of a public good, i.e., the mobile phone network.
It is public good that would have been too expensive for the fisherman to provide for themselves because of the increasing returns to scale.
[1] Transaction cost is simply the cost in making a economic trade.
Introduction of mobile phones
Sharp decrease in price volatility. Reduced waste & elimination.
Fisherman's profits went up by 8%. Consumer prices decreased by 4%
Notes
Mobile phone network is public good that has a very high increasing returns to scale. The scale here is the number of people who have access to mobile phones. If the number is small, the benefits are more limited. As the numbers increase, the benefits increase too. If we start from a very small scale, say one-tenth of the population being covered by mobile phones and double the network, so that one-fifth of the population is covered, it is intuitive that the pecuniary and non-pecuniary benefits accrued will be more than doubled. This will keep happening till the full population is covered.
Mobile phones have two components in its provisions. The first one is establishing the network. This entails creating a regulatory framework within which mobile operators operate. Only once this regulatory framework is established and mobile phone operators obtain their licence to operate that they start making their private investments in building mobile phone base stations that facilitate mobile phone communication.
The private investment (private capital formation) only happens once the public good (public capital formation) is in place.
Market Efficiency
Introduction of mobile phones made the fish market more efficient
i.e., a Pareto Improvement
Reduced waste & elimination
Sharp decrease in price volatility
Fisherman’s profits went up by 8%
Consumer prices decreased by 4%
Pareto Improvement
An intervention that makes some people better off without making anyone worse off is called a Pareto improvement.
Winners but no losers in the society
Pareto Efficiency
Pareto efficiency situations are one where you cannot make anyone better-off without making anyone worse off.
Winners and losers in the society
Adam Smith's insight
Well-functioning markets are Pareto efficient.
That is all mutually beneficial trades are undertaken and no trades than can make someone better off without making anyone worse off are left unexploited.
Well-functioning markets:
No one has market power
No information problem between the buyer and the seller
No externalities
Market
Fulton Fish Market
New York City
Fulton Fish Market
Wholesale fish markets in New York where restauranters buy fish in large quantities
Fulton Fish Market
Unloading the fish from the boats
Fish stalls in the Fulton Market
Graddy (2006)
Studied the transactions for whiting in Fulton Fish Market in 1995.
Graddy, K. (2006). Markets: The fulton fish market. Journal of Economic Perspectives, 20(2), 207–220.
Found that Asian buyers paid 10% less for the same quality of fish as compared to other white buyers.
Power relationships in the Fulton Fish Market
Asians buyers were socially organised and could boycott the sellers that cheated them
Why couldn't new sellers enter the market and compete with the old sellers
Power relationships in the Fulton Fish Market
Asians buyers were socially organised and could boycott the sellers that cheated them
Why couldn't new sellers enter the market and compete with the old sellers
Mafia controlled the parking in the streets around the market
It controlled the loading and unloading of the fish
Only sellers that had a relationship with the local mafia could sell in the Fulton fish Market
Market
Power
Infrastructure
Space
Power
Rules that apply in a particular space are determined by the entity that posses the power in that space
Government
Legislative,
Executive and
- Judicial bodies
Community
Mafia
Privately owned firms
Elinor Ostrom
Sociologist, Economics Nobel Laureate (2009)
Studied on how people in small, local communities manage shared natural resources - pastures, fishing waters, and forests.
Joint use of natural resources require rules agreed and enforced by the community
Stable membership of communities critical
for rules of organically develop.
Internet and Automated Algorithms
A social space constructed through automated algorithms
Facebook
Amazon
Wikipedia
Intermediating our social experience of the world and each other
Lefebvre (1974)
People in power impose spaces on the people who live in them
If the imposed space alienates people, people invent spaces through the acts of resistance to overcome the alienation.
Lefebvre, H., 1974. La production de l’espace. Paris: Éditions Anthropos.
Lefebvre, H., 1991. The production of space. Translated by D. Nicholson-Smith. Cambridge, MA: Blackwell Publishers.
Final Thoughts
Spaces and its rules reflects the existing power structure
Markets, Apps
Roads, Bridges
Cities
We constantly intervene and make spaces that confound humans and require maps and codes