What Is an Open Market Economic System, and How Does It Work?

What Is an Open Market?

An open market is an economic system with little to 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 free-market activity. Open markets may have competitive barriers to entry, but never any regulatory barriers to entry.

How an Open Market Works

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 go hand in hand with free trade policies, which are designed to eliminate discrimination against imports and exports. Buyers and sellers from different economies may voluntarily trade without a government applying tariffs, quotas, subsidies, or prohibitions on goods and services, which are considerable barriers to entry in international trade.

Open Markets vs. 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; prices 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 constraining free market activity. Closed markets may restrict who can participate or allow pricing to be determined by any method outside of basic supply and demand. Most markets are neither truly open nor indeed closed but fall somewhere between the two extremes.

The U.S., Canada, Western Europe, and Australia are relatively open markets while Brazil, Cuba, and North Korea are relatively closed markets.

A closed market, which is also called a protectionist market, attempts to protect 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 native entity or citizen who owns a certain percentage of the business. The nations that adhere to this rule are not considered open relative to other countries.

Example of an Open Market

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 (EU) believes that free trade can only exist when businesses can fully participate. Therefore, the EU ensures that its members have access to all markets.