Market participant can refer to a U.S. state that buys, produces, or sells goods in the marketplace, rather than acting as a regulator. This term has developed a special definition under U.S. constitutional law. The U.S. Supreme Court, in applying the commerce clause of the constitution in 1980, had to decide if a state-owned cement plant could offer preferential terms to buyers who were state residents and less favorable terms to non-residents. By defining the state as a market participant in that case, the court caused the term to have a precise legal meaning in applying the commerce clause to subsequent cases involving states.
Interstate commerce was considered so important to the flourishing of the nation that impacting it in any way was specifically reserved to the federal government in Article I of the U.S. Constitution. Application of this clause prohibits states from passing any law that unduly restricts interstate commerce. National law under the Constitution was designed to protect all states equally and to reserve to the federal government the ability to pass laws that would affect the rights and obligations between states. This was to ensure the harmonious development of the country, so that states were not able to operate as mini fiefdoms, passing exclusionary laws to benefit state residents and burden out-of-state residents.
Ordinarily, a state regulates commerce within its borders. The application of the commerce clause to this situation would test whether or not the state has uniformly applied the regulation to both in-state and out-of-state businesses. In certain cases, however, the state is the actual buyer, producer, or seller of the goods. The U.S. Supreme Court had to decide if there was any distinction between the state as a regulator and the state as a market participant, or business owner, for purposes of the commerce clause.
For example, a state might be a market participant by acting as the purchaser of contracted services to build a state office building. A state can also act as a market participant by selling academic services through state-owned universities. In both instances, the state offers in-state businesses or residents preferential treatment.
The U.S. Supreme Court looked at this issue and said there was a distinction between when the state acts as a regulator and when it acts like a private business. As a market participant and not a regulator, the state’s expenditure of funds can be considered the same as any private business that has the right to stipulate how it spends its money. The court held that states have the right to engage or shun customers or suppliers as it sees fit when the state is a market participant.