What is an open market?
An open market is an economic system without barriers to free market activity. Anyone can participate in an open market, characterized by the absence of tariffs, taxes, licensing requirements, subsidies, unionization and any other regulations or practices that interfere with naturally functioning operations. Open markets can have competitive barriers to entry, but never regulatory barriers to entry.
Open market explained
In an open market, the price of goods or services is mainly dictated by the principles of supply and demand with limited interference or influence from outside large conglomerates or government agencies.
Open markets go hand in hand with free trade policies designed to eliminate discrimination against imports and exports. Buyers and sellers from different economies can trade voluntarily without a government applying tariffs, quotas, subsidies or prohibitions on goods and services, which are considerable barriers to entry into international trade.
Key points to remember
- Open markets are considered highly accessible, with few or no boundaries preventing a person or entity from participating.
- The United States, Canada, Western Europe and Australia are examples of relatively open markets.
- Most markets are neither genuinely open nor genuinely closed.
Open and closed markets
An open market is considered highly accessible, with few or no boundaries preventing a person or entity from participating. The US stock markets are considered open because any investor can participate, and all participants are offered the same prices which only vary according to changes in supply and demand.
An open market can have competitive barriers to entry. Major market players can have an established and strong presence, making it more difficult for small or new businesses to enter the market. However, there are no regulatory barriers to entry.
An open market is the opposite of a closed market, that is to say a market with a prohibitive number of regulations limiting the activity of the free market. Closed markets can restrict who can participate or allow prices to be determined by any method outside of basic supply and demand. Most markets are neither truly open nor closed, but fall somewhere in between the two extremes.
The United States, Canada, Western Europe and Australia are relatively open markets while Brazil, Cuba and North Korea are relatively closed markets.
A closed market, also called a protectionist market, attempts to protect its domestic producers from international competition. In many countries in the Middle East, foreign companies can only compete locally if their business has a “sponsor”, which is an indigenous entity or citizen who owns a certain percentage of the business. Nations that adhere to this rule are not considered to be open to other countries.
Real example of an open market
In the United Kingdom, several foreign companies compete in the production and supply of electricity; thus, the United Kingdom has an open market for the distribution and supply of electricity. The European Union (EU) believes that free trade can only exist when businesses can participate fully. The EU therefore guarantees that its members have access to all markets.