EME 805
Renewable Energy and Non-Market Enterprise

1.3 Market Formations


1.3 Market Formations

(Coordinate with reading from Chapter 4)

In this section, we begin to analyze the various forms of markets. Aspers has, again, defined a market "as a social structure for the exchange of rights in which offers are evaluated in price and compete with one another." (p. 64) So, this definition of markets requires a social structure as a core element. This social structure is defined by the relationship between buyer and seller, in its most basic form.

Social Structures

What is important to acknowledge and recognize here is that market structures are fundamentally social structures, and market interactions are essentially social interactions. When we discuss the central ordering principles of markets and what Aspers presents as a market typology, we have to understand that these are based on the social roles played by either buyer or seller. The most basic ordering principle, of course, is to sell high and buy low. In the typology presented by Aspers, there are two main ways of defining markets based on the producer-consumer relationship, i.e., standard markets and status markets.

Market Typology

The first major distinction is about how the commodities produced within a given market are valued. This distinction is between standard markets, where the valuation is based upon material quality, and status markets, where the form of valuation is based upon the social status of a given product. Standard markets are arranged around high-quality, volume, delivery, and low price (like an energy market). Status markets are arranged around identity, image, class, high-quality, and typically higher price (such as the luxury car market). Remember these distinctions; because, while it seems that renewable energy production may be an issue only of standard markets, the idea of renewables and the long-term prevention of issues such as climate change operate much more according to the patterns and rules of status markets.

The second major distinction in the market typology is between the kind of roles buyers and sellers play, namely between fixed roles and switch roles. In some markets, such as a traditional bazaar, the agent can play the role of either buyer or seller. This form of role switching would also apply to the floor of the New York Stock Exchange, where traders are both buyers and sellers. We can even see this in energy markets. For example, consider the residential house that has solar panels on its roof that can allows for the home's energy system to both upload and download energy from the grid. In this case, the resident is both buyer and seller of energy. However, this is around a fixed commodity, namely, electricity, which is usually fixed to a non-negotiable standard market price. Why is this important? As we will see later in the course, if you do not know this already, one of the major challenges of residential solar is being able to upload one's surplus energy to the grid based on market price. The reason this is difficult is that these roles have traditionally been fixed, or not switchable.

Ordering Principles of Markets

 city skyline with buildings lit up and the sky is dark, smoggy and slightly orange from all the lights
Shanghai, China at night.
Photo credit: Erich W. Schienke

Each market is about something. So, when you begin to define a market, you need to identify precisely what the market is about. This may not be always as obvious as it seems, particularly in energy markets. For example, wind-generated electricity is going to cost more to produce than coal-generated electricity. However, the conditions of the status market might be such that consumers are willing to pay a higher price for wind-generated electricity precisely because it is renewable. So, can we really say that coal-generated electricity is operating in the exact same market as wind-generated electricity? A better comparison, at least, would be to compare wind-generated electricity to solar-generated electricity—these two are at least competing in markets that are more similar to each other.

Every market has a specific culture as to how things are done. When we speak of oversight, rules, laws, methods of standardization, and means of arbitration, we are talking about cultural norms that have been turned into formal institutions, whose legitimacy is often backed by the force of the state. Informal cultural practices in markets would include specific terminology, modes of socialization into the workplace, expected norms of behavior, and means of translation between the market world and other social worlds.

All markets have a means for determining the economic worth of a particular exchange or offer. The traditional conception of this is often based on a supply-demand analysis, where the greater the demand for a limited supply, the higher the price will go. The scarcity of materials, for example, certain minerals needed to manufacture magnets for wind turbines, can often be calculated based on an aggregation of the current stock of the material, the cost to extract, the cost to refine, the cost to transport, projected future scarcity, etc. Scarcity can also be due to artificial restrictions of the given material by government or cartel. Another standard method for determining value would be through some variety of an auction. (The reading details multiple forms of auctions.) And, there are the status markets, which are based upon the consumer's willingness to pay for the image or identity that the producer is selling.

Applying these Concepts

We can use the principles presented here as tools for defining market boundaries. The definition of market boundaries becomes important when trying to deal with issues of competitiveness. Recognizing competitors requires understanding the boundaries of the market, particularly if you are a company wanting to move into either an entirely new market or expand into an already existing market. We will come back to these distinctions time and time again throughout the course, so be sure you comprehend them.