Seller’s Market

What is a Seller’s Market?

A seller’s market is a market which is short on supply and relatively high on demand, giving the seller, who possess the scarce commodity, the power to fix the price, making the buyer a price taker and hence the seller a price maker.

Explanation

  • In this market, there is a limited supply of goods or services. It is common in natural resources that are not readily available. Such a market supply is controlled by the seller and it gives her the power to fix the price.
  • It is also common in the property market. When the supply of property is limited, the sellers have higher bargaining power and they set the prices. Because the property market is limited to geography, a supply of units in particular geography will be limited.
Seller-Market

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Source: Seller’s Market (wallstreetmojo.com)

Characteristics of Seller’s Market

The major characteristics are discussed below:

  1. Short supply of goods and services.
  2. Limited number of sellers.
  3. Sellers dictate the price of goods and services.
  4. Buyer is the price takerPrice TakerA price taker is an individual or firm with no control over the prices of goods or services sold because they usually have small transaction sizes and trade at prevailing market prices. Individual investors act as price takers in the stock market.read more
  5. Monopolistic and oligopolistic markets.
  6. Stiff competition amongst buyers.
  7. Bidding and competitive auctions are common.

Examples

Let us understand with some examples.

Example #1

Below is an exhaustive example from the property market.

Assume a town has 10,000 houses and is seeing a lot of inbound immigration. The houses available for sale in this town are limited to 200 units. The inbound immigration is creating a demand which is higher than the currently available supply of houses. As a result, the prices are pushed up by the new buyers of houses.

Such markets can have a lot of competition amongst buyers to out pay each other. Such competition takes the prices high levels. Such conditions also give birth to high speculation amongst the participants in the markets, pushing up the prices to unsustainable levels.

Example #2

Assume a country has limited reserves of coal and the government controls the supply of coal for the public as well as private uses. Imports are also limited as the government imposes high import duty. Because mining is licensed, only a handful of contractors are given permits to mine coal and sell it. Because coal is in short supply in this market, the sellers determine the price they will sell the coal for. In the absence of a market-driven price-setting mechanism, the coal in this market may be pricier than the coal in the international market.

How to Determine whether it is the Buyer’s or Seller’s Market?

If there is a lack of competition in the goods or services under consideration along with its high prices, the market can be considered a seller’s market. In such a market, suppliers make out-sized margins and in a perfectly competitive market, those margins will be driven southwards by more competition. Such competition does not come and prices remain high for a prolonged period of time.

Guideline for Buying and Selling in Seller’s Market

  • No matter how much sellers fix the price of a good or service, there comes a time when the price reaches unsustainable levels when there is a shortage of buyers. Because there is no one left to push the prices higher, prices see some corrections. The correction could be small or large depending on how trapped the sellers are at those higher prices.
  • For example, in housing markets, sellers sometimes would have bought houses on high leverage just to sell it to the next buyer at high prices. When the next buyer refuses to pay a high price and price sees small corrections, these leveraged buyers jump to liquidate their inventory to avoid losing their net investment. This further aggravates the price decline leading to a deep correction.

Difference Between the Seller’s Market and Buyer’s Market

  1. A buyer’s market has a higher competition while a seller’s market lacks competition.
  2. Seller fixes the price in a seller’s market while the market fixes the price in the buyer’s market.
  3. Seller’s market has a short supply while supply is abundant in the buyer’s market.
  4. A seller’s market might come under regulations while a buyer’s market will almost always be driven by the market forces.
  5. Seller’s market has high prices while a buyer’s market is characterized by reasonable pricing.

Advantages

  • Advantageous for sellers as they make outsized profits.
  • In some markets seller is the biggest employment creator and employer.
  • Most of the time policymakers intervene in these markets to set things right for the smooth functioning of the market.

Disadvantages

  • Lack of competition makes the market inefficient leading to skewed price discovery.
  • Skewed price discovery sometimes leads to abnormally higher prices for buyers.
  • Sellers collude to exploit buyers hurting their interests.
  • Seller’s sometimes don’t keep their words and sell their goods to the next available buyer for a higher price.
  • It creates inequality where sellers hold disproportionate wealth while buyers remain poor.

Conclusion

  • No market remains a seller’s market for a long period of time. Most often than not, abnormal profits are met is more entrants and the extra margins vanish and all the sellers make normal profits.
  • Government across the world keep their eyes open for such markets. Whenever there is too much power concentrated amongst the sellers, the government intervenes and brings some sanity into the market. It may do that by regulating the industry directly by framing laws or indirectly using taxation and other tools.
  • In some markets, the government is the only seller ensuring the judicious distribution of resources for the greater good for the nation and the economy. However, the government as the sole supplier opens up significant scope for corruption, which again results in misuse of power by the few in government companies or departments. In such cases, a few benefits while the majority of market participants suffer.

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This has been a guide to what is the seller’s market. Here we discuss characteristics, examples, and how to determine buyers’ and seller’s markets along with guidelines for buyers & sellers. You may learn more about financing from the following articles –

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