Spot marketing trading

2.50 The conception of market exchange found in most textbooks is one of an impersonal, one-time encounter between a buyer and seller of a standardized good or service. In such transactions, goods, services, money, and titles are transferred simultaneously: ie. 'on the spot'. Trade takes place in goods which have already been produced with market prices serving as the primary source of exchange-relevant information, constraints, and incentives. Each of the participating parties make independent decisions based on their own conditions and preferences and on the available information about the preferences and behavior of others.

2.51 There are several potential advantages of spot market trading over more elaborate trading or organizational ties (Hayek (1945); Williamson (1985)). First, the market price system offers clear and powerful incentives. Prices automatically meter and reward productive effort and, unlike in the case of many alternative institutional arrangements, the distributional consequences of spot market exchange are not complicated by past or future considerations or by the provision of non-measured services. Second, trade in this mode offers wide scope for flexibility to respond to changes in market conditions as it is generally easier to negotiate an adjustment in price levels alone than to agree upon and implement changes in trading rules or lines of command. Third, market prices place clear and powerful constraints on individual behavior-- factor prices provide budgetary constraints, while final goods prices provide purchasing constraints. In contrast, under alternative institutional arrangements, most behavioral constraints must be negotiated and supervised. Finally, in a competitive environment, spot market trading provides informational economies with market prices 'summarizing' all or most of the information which transactors require to conduct trade.

2.52 Spot market transactions can occur across several different types of markets, including auctions, private treaty, and posted price (Cassady (1974); Marion et al. (1986)). Auction markets feature an impersonal competitive bidding process which 'discovers' the market price. Auctions provide for very low transaction costs when large quantities of standardized products are traded. They also provide for great flexibility of prices which tend to change from minute to minute. If the auction is well supplied, trading may provide up-to-date information on supply and demand conditions. Auction markets generally feature standardized procedures for the exchange of payments for and title to goods.