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Wednesday, November 13, 2019

The reason prices work in a free market

A price is an agreed-upon amount of money for a buy to pay a seller in exchange for goods and/or services.

The definition is not as exciting as reality.

• Sometimes they don't agree.
• Sometimes the price fails, and there's no transaction.
• Sometimes prices exclude some people and not others.
• Sometimes the seller reinvests from what was paid at a high price to enable more product delivery at a lower price.

A potential transaction starts an interaction. Mutual exchange of value is sought. For the seller, the price must be high enough; for the buyer, the value must be high enough and the price low enough. If buyer and seller can agree, then begins the great mystery and intrigue of negotiating over how much overlap there is in the price range for agreement: How much can the buyer pay? Will the seller go lower? If they agree to meet on a price, the transaction can proceed. If not, the transaction fails. In a free market, there is no guarantee, and that uncertainty is exactly why it works so well.

For some people, this is terrifying. Negotiation is unsettling. For those willing to overcome those fears, the rewards can be high. The larger the transaction, the larger the room for overlap on price between buyer and seller.

Once agreement is reached, it can be reached again, and again. This is why repeat customers and repeatable transactions are so valuable. The hard work is done. Agreement on price has been found. Now, just do it over and over. (This process repeating is also why people get used to assuming negotiation is not part of a transaction.)

Not all prices are fixed. Even stores that don't negotiate prices are fluid competitors in the marketplace. People negotiate and impose their customer uncertainty by taking their business to a competitor with a lower price.

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