1- Foundations of Market Engineering

1. New Institution Economics

   1.1. A Short History of Economics

   1.2. Origin and Function of Institutions

2. Definition: Market Engineering

3. Use Cases

Market

The market is a mechanism for ressource allocation where supply and demand meet

Theoretical (virtual) location where demand and supply meet

Price Mechanism

Market price evolves through interaction of supply and demand

(arz ve talebin etkilesimi araciligiyla degisim gecirir)

Neo-classical Theory

The economic problem of society is how to allocate given ressources

Neoclassical Theory assumes Perfect Markets

• Utility maximization of consumers

• Profit maximization of suppliers

• Homogenous goods

• No personal or time preferences

• Perfect transparency of markets

• No transaction costs

• Immediate response of market participants

The main contribution of neoclassical theory

The market will take care of the allocation problem, if permitted to do so

Assumptions

Coasean World

(Absence of Transaction Costs)

• search and information costs

• bargaining and decision costs

• policing and enforcement costs

The world of zero transaction costs is unrealistic!

Hayek´s Critique to Neo-classical Theory

The economic problem of society is not a problem of how to allocate given ressources, it is rather a problem of the utilization of knowledge not given to anyone in its totality.

The marvel of the price system is the efficient communication ability.

Arbitrage Considerations

• Buy underpriced goods

• Sell overpriced good

-> Prices are corrected by Buying and Selling

Behavior

-> Markets communicate private knowledge

efficiently (information aggregation and

dissemination)

dissemination: yayilma

New Instituional Economics

Market = Demand & Supply + Institutions

Institutions

• humanly devised constraints that structure political, economic and social interaction

• consist of both informal constraints and formal rules and the enforcement characteristics of both

• give order to social life (regulated markets)

  • Order: various elements in a system remain in a recognizable and predictable interrelationship

  • Institutions prescribe a behavior

    => No need for costly information and

    enforcement actvities

    =>Reduction of transactions

    costs

  • e.g. Standard Form Contract

    
    

Institutions explicitly incorporate

• Principal-Agent Theory

• Property Rights Theory

• Transaction Cost Theory

devised: icat edilmis

enforcement: yaptirim uygulama

incorporate: bünyesinde toplamak,birlestirmek

Formal Institutions (written rules)

are written rules that

• form the basis for enforcement

• All violations are enforced by authority according to the written (planned) sanctions

• Authority is not limited to the government

Informal Institutions (spontaneous feedback)

• usually not written or at most partially

• Enforcement is not specified in advance

• Spontaneous feedback of the society “punishes” the violators

The Origin of Institutions

Conscious Design (bilincli)

• Constructive / structured

• Social institutions were and should be created by conscious deductive processes of human reason (Smith, 2003)

• Society has a function independent of the individual agents who form the society

• Individual agents must be coordinated in order to achieve this social goal of society

  
  

Spontaneous Order - Hayek´s Catallaxy

(kendiliginden düzen)

• Institutions are formed as a result of a cultural-evolutionary process on the basis of which institution can best solve the coordination problem

The conscious design of institutions is inferior to spontaneous order

• only spontaneity recognizes and embodies both the dynamic flux in the environments and the inadequacy of agent´s knowledge

  (inadequacy: yetersizlik)

enforce: zorla kabul ettirmek, uygulanmak

conduct: davranis kurallari

Well designed market can replace institutions

-> create incentives to act in a certain way instead of

rules

Market Engineering comprises the

• structured, systematic and theoretically founded procedure of

• analyzing, designing, introducing and also quality assuring

• of (electronic) market platforms as well as their legal framework

simultaneously regarding their

• market mechanisms and trading rules,

• systems and platforms and media rules and

• business models and rules.

Framework of Market Engineering