Saving "the Market” out of Cambridge: “Market Aggregation”

 

Once upon a time, there were two towns, economically identical but politically-independent: namely, the Garden City of Eden and Wonderland of Alice. Naturally, the market conditions, including the quantity traded and the price (in average) are all the same. Not to mention, each enjoys the same amount of “consumer surplus” or “producer surplus.”

             Now, suppose that the two towns establish a diplomatic tie and combine two township economies into one. That is to be called “market aggregation” as opposed to mathematical integration: the former with “marginal” the latter with infinitesimal.

Elastic and expansive. In the aggregated market, the market price remains the same while the quantity and the communal surplus will each be the arithmetic sum total from the two separately. The market is lengthened without (vertical) expansion of communal surplus or enhancement in efficiency.

             If we assume that suppliers of Alice are more productive, and that demanders of Eden are more desperate for the product, the market after aggregation will be both lengthened and expanded, with the market price between the two old ones. Consequently, some fresh value in terms of incremental surplus is certainly created: efficient Alicians increase “supply” at the expense of Edenian counterparts, while some higher-valuing households in Eden can now afford to consume at the expense of lower-valuing Alicians. This immediate benefit from trade is applicable to any other case where the two prices before aggregation are different.

             More efficient or not, both the demand and the supply curves become more elastic after aggregation, which means that the market becomes larger and more competitive. As a result, economies of scale will follow in the short run and the so-called “dynamic gains” in the long run. Either benefit of aggregation takes place in the market, but is to be analyzed outside of the market framework. 

             Once again, the market as framework is built for the single accounting period. Never apply to the  framework over-time changes in “the dual monarchs of tastes and technology” (Paul Samuelson and William Nordhaus, Economics, 2010, p.28). Don’t even think, either, about “average cost,” variable or fixed, short-run or long-run. Like it or not, there in reality are no such things as AVC, AFC, SRAC, LRAC and the like. If ever, any is snake oil.

Transaction costs as mobility barriers.   If there are transaction costs or other types of mobility barriers between the two markets, aggregation would be hindered or stopped. Then, benefits, or net increase in the surplus more specifically, from market aggregation will be reduced by as much. For example, Alicians would be able to serve fewer Edenian “customers,” as it were, with transaction costs than without. Some producers (of Alice) and other consumers (of Eden) are surely to lose out.