How entrepreneurs lead productive market imperfections- one of the first types of imperfections is brought about by entrepreneurial leadership. If you provide incentives to entrepreneurs in the economic market, imperfections add value for entrepreneurial leaders as well as adding value to the efficiency of the economic system. The public markets recognize the value created is worth preserving. There are benefits to market imperfection. When raising venture capital this element is critical. Market Imperfections are profit opportunities for entrepreneurs to solve problems and provides a means to isolate that entrepreneurial leadership from market pressure, for a time.
The first step is a deeper understanding of the nature of market imperfections. Fortunately, not all market imperfections are created equal. Some market imperfections, despite their preventing equilibrium, operate to continually add value to an economic system. Others do not. And from a practitioner and public policy standpoint, it makes sense to encourage the one, while eliminating the other.
The isolating mechanisms ;that society provides as an incentive for discovery are known as patents, and copyrights (although there are several others [see Rumelt, 1987]). Patents and copyrights are designed to prevent competitors from eroding the benefits of entrepreneurial discovery during a protected period of time. As noted previously, these types of imperfections are to be encouraged because they provide rewards for entrepreneurial discovery. An in-depth discussion of the various types of market imperfection, and how they may be used to add to the success of a venture is undertaken in the New Venture Template Topic Review Notes.
Unproductive market imperfections- The second type of market imperfection does little to add value to the economic system. This type of imperfection creates conditions of demand without supply or supply without demand through the use of power. Here, players in the economic game use their economic assets to influence the rules of the game, i.e. they influence governments (Etzioni, 1988) to create and sustain market imperfections that give profit to these powerful players whether or not they add the value of discovery to the system.
In modern society, governments (especially the U.S. government) intend to act to preserve the integrity of the market system by removing the unproductive market imperfections that restrain trade. Such actions as the enactment and enforcement of anti-trust laws are examples of laws that are geared to level the playing field. Thus, under these laws, such actions as the fixing of prices to restrict competition are illegal, and carry stiff penalties (treble damages, jail time etc.). So initially, society does grant power to governments to make and enforce rules that keep the game fair, and governments act in response to this charge.
However, given the nature of the free enterprise economic system (where only the fit survive), there is tremendous incentive for players in the game to go outside the game. With assets earned;in the game, players attempt to influence the rules in their favor; to subvert or co-opt the rule-making power of government in order to gain competitive advantage.
For example, it is in the interest of players in the free enterprise game to induce governments to simulate the profit-generating effects of entrepreneurial discovery, and to obtain from them goods and services at below-market costs (e.g. subsidized or guaranteed loans, access to facilities or knowledge, etc.).
In so doing, governments can create a market imperfection that is virtually invisible to the market, and therefore not susceptible to market pressures for efficiency. This is a version of the "buy low--sell high" result of market imperfections in general.
However, it is a version that does not require value-adding entrepreneurial insight. Hence the need for the elimination of this and other unproductive market imperfections similar to it.
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Dr. Ronald K. Mitchell is a specialist in entrepreneurial cognition, global entrepreneurship, and venture management. He developed the Entrepreneur Assessment which won the acclaimed Heizer Award for this groundbreaking research. Find out more entrepreneurs at http://www.venturecapital.org/
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