The main take away from my Silicon Valley trip is the understanding of “market“. I know, the recent financial crisis can be used as a way to argue the other way, I am still talking about the relative older style of market (like the flea market, and fish market), not the financial innovation stuff.
Hotwire and Priceline
Websites like Hotwire.com and Priceline.com (how I found it) let me think more about how to use the market to allocate resource more efficiently. Without services like Hotwire, hotel suffers from empty rooms, and visitors suffers from high price. They are the bridge to allow those unsold rooms to be evaluated and priced – the price is lower than retail price, which is very likely to be the fair market value of the “unsolde” rooms.
“Market allow any tradable item to be evaluated and priced.”
Another interesting thing is the rental contract I saw in my friend’s house. When their last lease period is going to expire, the landlord gives them a list of renew price. It is something like this (I mocked up the numbers)
1 month – $1710
2 months – $1700
3 months – $1670
4 months – $1640
5 months – $1610
6 months – $1690 <– Attention! Price raises!
7 months – $1710
8 months – $1720
9 months – $1840
10 months – $1700
11 months – $1640
12 months – $1600
The idea is, it is not the longer you lease, the cheaper it is. It is obvious that the 9 months lease is the most expensive lease. My guess is, it is the time most of the tenant in this area planned to move out (based on the existing contract and prediction), or the season where many graduate are moving in. The price of the house is decided preciously in a bid-offer fashion, not by some ideology (the longer you rent, the cheaper it is)
That is a vivid lesson for me to understand the market.
A market is the PLACE for buyers and sellers to trade.
Its function include pricing – market finds out the fair market value of any tradable item every minute.
The liquidity of the market is important. Liquidity means a seller can always sell something if they are willing to decrease the price a little bit above the fair market value, or the buyer can always buy something if they are willing to offer a little bit higher price than the fair market value.
“The essential characteristic of a liquid market is that there are ready and willing buyers and sellers at all times” – Wikipedia on Market Liquidity.
The market rule is only the price and item – for the same item, it is just the price.
The only way to decrease the price of an item is to increase supply.
The God of Market
It seems I need to spend more time to understand how the God of Market works, and its role in price discovery, and resource allocation.
China is a market economy, but in daily life, it is still not very market driven.