Improving Agricultural Market Performance:
Creation and Development of Market Institutions
11
1.1 Introduction to Marketing Systems
1.1.1 Defining Markets and Market Systems
Markets are based on physical and conceptual contexts where the rules-based1 exchange of
goods, products, and services takes place.2 The price, value, and flows of these goods, products,
and services are determined by their demand and supply, while the rules governing markets
are shaped by private contracts, cultural norms and values, and - particularly - the legislative
and institutional context. Hence, markets encompass the entire equilibrium between demand
and supply.3
Competitive markets censure efficient allocation of resources, distribute inputs and outputs
across time and space, facilitate transformation and value-addition to products, and convey
market information and risks.4 No single producer or consumer can dictate price, supply, or
demand in a fully-fledged competitive market. Efficient and competitive markets ensure that
sectorial and macro-level policies provide incentives and address challenges faced by micro-
level decision-makers while simultaneously underpinning significant opportunities. Moreover,
competitive markets also play a fundamental role in managing risks emerging as a result of
shocks in demand and supply by facilitating adjustment in net export flows across space and in
storage over time, thereby stabilizing prices and reducing the price volatility faced by
consumers and producers
A number of conditions need to be satisfied for markets to form and develop into competitive
and efficient systems:5
 Profitability – The generation of profits is the key incentive for market participants to
enter a market.
 Diminishability – The stocks of products and goods will diminish as more products and
goods are consumed. Prices will respond to lower stocks and encourage (additional)
production.
 Rivalry – Not only producers but also consumers “compete” in a efficient market in
order to obtain the benefit of the product or service. A need exists to be competitive to
secure the benefit of the good.
 Excludability – It is essential that consumers can be excluded from obtaining the
benefit that comes from consumption and not become “free-riders”, which undermines
the effectiveness of markets.
 Rejectability – Consumers are not forced to purchase goods or products in case they
reject the quality or quantity of the good or product.
1 FAO/INRA (2016), Innovative markets for sustainable agriculture - How innovations in market institutions encourage
sustainable agriculture in developing countries, p. 2, Rome: Food and Agriculture Organization of the United Nations and
Institut National de la Recherche Agronomique.
2 International Livestock Research Institute (1995), Livestock Policy Analysis, pp. 111-148, Addis Ababa: International
Livestock Research Institute.
3 Tollens (2010), “The neglect of food market in developing countries,” in Van Trijp, H. & Ingenbeek, P. (eds.), Markets,
market and developing countries: Where we stand and where we are heading, pp. 23-32, Wageningen: Wageningen Academic
Publishers.
4 Barrett, C. & Mutambatsere, B. (2008), “Agricultural Markets in Developing Countries,” in Blume, L. & Durlauf, S. (eds.), The
New Palgrave Dictionary of Economics, pp. 2-3, London: Palgrave Macmillan.
5 Economics Online (2017), Competitive markets, available at
Accessed August 2017].