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What is Price Discovery?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 07 December 2016
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Price discovery is a process that allows market prices for goods and services to be determined. It is a constantly ongoing and developing series of negotiations that includes input from a number of sources. At any given time, prices can fluctuate considerably. Tracking prices usually involves the creation of averages that look at all prices within a given period and even them out to arrive at a meaningful number. Up-to-the-minute reporting on prices for some goods and services is provided through financial publications and broadcasts so that people can make decisions on the basis of current information.

The cornerstone of price discovery is the interactions that take place between sellers and buyers. Both parties want to get the best price, and are approaching the negotiation from opposite perspectives. Sellers want as much money as possible while buyers want to pay as little as possible. Their interactions are influenced by current market conditions, supply, demand, and many other factors that come together to determine a fair price.

A classic example of price discovery can be seen on the trading floors of stock exchanges. Every time stocks are bought and sold, prices change as people respond to the fortunes of the companies they are trading, market pressures, the time of day, supply, demand, and numerous other influences on price. Prices can also vary between markets; agricultural commodities, for instance, may fetch different prices depending on where they are being traded because the market influences change with locales.

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Individual consumers also engage in a certain amount of price discovery. Every day, people make decisions about how much to pay for products and services and these choices influence prices. Companies in competition take note of the prices offered by competitors and the level of successful sales, adjusting their prices to appeal and capture more of a market share. Constant adjustments to prices ensure that companies keep pace with the market and do not lose out on sales or trends.

Advocates of the free market argue that price discovery is a natural process that ensures fair, accurate, and responsive pricing. Governments may occasionally step in on the pricing process if there are concerns about economic stability, an activity that is frowned upon in some areas. Some investors appreciate regulatory actions taken to prevent economies from spinning out of control, while others feel that prices should be allowed to self-correct, even if that means economic turbulence.

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