Market building by strategic interactions: The role of powerful private actors and the state

Abstract

We analyse the building of markets, the central institutions in modern societies. We base our analysis on a game-theoretic approach that formalises how markets are built in a decentralised manner by the strategic interactions of actors whose expectations have to be aligned. Markets organise economic exchange among many participants whose action choices may be anonymous and simultaneous but are always interdependent. Private and state actors invest in the building of markets to reduce transaction costs and enable growth. Those who invest in market building critically influence which of the many possible market solutions evolve. In three case studies, we describe how private investment in information management, as well as standardisation and the development of products, creates and stabilises markets. We discuss how the state uses regulation, market participation, information management, and public investment to ensure that private initiatives can take place and that what evolves out of private initiatives remains in accordance with societal goals.

Keywords: strategic interactions, market building, private investment, state intervention