What is an ‘Open Market’?
An open market is an economic system with no barriers to free market activity. An open market is characterized by the absence of tariffs, taxes, licensing requirements, subsidies, unionization and any other regulations or practices that interfere with the natural functioning of the free market. Anyone can participate in an open market; there may be competitive barriers to entry, but there are no regulatory barriers to entry.
BREAKING DOWN ‘Open Market’
In an open market, the pricing of goods or services is driven predominantly by the principles of supply and demand with limited interference or outside influence from large conglomerates or governmental agencies.
Open Markets Versus Closed Markets
An open market is considered highly accessible with few, if any, boundaries preventing a person or entity from participating. The U.S. stock markets are considered open markets because any investor can participate, and all participants are offered the same prices that only vary based on shifts in supply and demand.
An open market may have competitive barriers to entry. Major market players might have an established and strong presence, which makes it more difficult for smaller or newer companies to penetrate the market. However, there are no regulatory barriers to entry.
An open market is the opposite of a closed market – that is, a market with a prohibitive number of regulations restricting free market activity. Closed markets may restrict who can participate, or they may allow pricing to be determined by any method outside of basic supply and demand. Most markets are neither truly open nor truly closed but are somewhere 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.
The opposite of an open market system is a protectionist market. A protectionist market attempts to protest its domestic producers from international competition. In many Middle Eastern countries, foreign firms can only compete locally if their business has a “sponsor,” which is a national in the Middle Eastern country who owns a certain percentage of the business. The nations that adhere to this rule are not considered open relative to other countries.
In the United Kingdom, several foreign companies compete in the generation and supply of electricity; thus, the United Kingdom has an open market in the distribution and supply of electricity. The European Union believes that free trade can only exist when businesses can actually access their markets. Therefore, the EU ensures that its members have access to all markets.