Markets provide a platform through which firms compete for both resources and customers. How effectively firms perform these tasks depends primarily on how open the markets are, including the markets for factors and products, and how freely firms can be created and compete with each other. Essentially, firms’ effectiveness depends on how smoothly and quickly factors of production can change hands in response to competitive bidding, how easily factors and products can move across boundaries (physical and social) in the economy, and how readily new firms can come into being with innovative products or ideas on how to organize factors in fresh ways.
The second and related operation of the markets is to provide feedback to firms, rewarding first that do a better job in satisfying and punishing those whose goods and services fail to please buyers. This can be accomplished when firms that succeed in winning the patronage of customers also succeed in the factor market in securing the services of factors of production. A serious problem thus arises when an economy with an open product market does not have an equally open factor market.
-Ronald Coase and Ning Wang
(H/T: Cafe Hayek)
