On Pseudo-Markets
Better mousetraps die in procurement
A market has to clear - that’s the whole point.
Buyers and sellers meet at a price that compresses dispersed information into a single number, and the number coordinates. Hayek’s entire project rests on this; strip away the romance and the trimmings, and a market is a signalling mechanism with output as its price.
But a good many of the things we call markets fail to do this...
They have all the furniture. They have prices; they have supply curves and demand curves, sales teams and procurement officers, RFPs and quarterly forecasts, dashboards and KPIs. The price, though, is no longer the signal. The signal is something else: a status game, a regulatory position, a contractual chokehold on switching costs, or a procurement process that exists to launder a decision that has already been made.
Let’s call these pseudo-markets.
Most of enterprise software is a pseudo-market; so is higher education; ;arge parts of healthcare; almost all of defence; and significant chunks of professional services. Once you start looking, the genuine price-clearing market starts to feel like the exception, rather than the default.
The playbooks designed for real markets will get you killed. Build a better mousetrap, and the procurement officer will book the meeting with the incumbent’s regional account manager because that’s whose name is on the email chain from last year. Drop your price by 40%, and you’ll be flagged as suspiciously cheap. Win on a feature comparison matrix, and the matrix will be filed in a drawer next to the decision that was made before you arrived.
So: a field guide.
Spotting a pseudo-market
In a real market, the buyer eats their own cooking. The person paying is the person consuming, or something close to it. In a pseudo-market, the buyer is insulated from outcomes by their job description. A CIO buys the ERP system; and a thousand employees use it for a decade. A dean signs the deal for the learning management system; and the students must endure it. A general procures the platform; the soldier carries it. The feedback loop between use and purchase is broken by design.
Once it’s broken, the purchase decision optimises for something other than actual usage.
In a real market, both sides bear risk. The buyer might overpay, and the seller might undersupply, but both have skin in the game, and the price reflects how each side prices that risk. In a pseudo-market, risk asymmetry is grotesque - the seller only bears a sliver of it. If their software is bad, the buyer’s organisation eats five years of switching costs before anyone considers replacing it. If their consulting engagement under-delivers, the buyer’s sponsor will defend the spend rather than admit they wasted it. The procurement officer’s career depends on the deal not being seen as a mistake; which is a vastly different problem from the deal being actually good.
A diagnostic: ask what happens when a competitor offers the same thing for half the price. In a real market, the share moves. In a pseudo-market, nothing happens. The procurement department says they’ll consider it for the next cycle, but they don’t.
Another: the existence of a category called “trusted vendor” or “preferred supplier” or “approved list.” Real markets don’t have approved lists. Approved lists are the residue of a decision that has been pre-made and now needs to be defended. They’re the form that risk-aversion takes when it’s allowed to set its own constraints.
Taxonomy
Status markets. Higher education is the cleanest example. The price of an Ivy League education has no real connection to the marginal cost of teaching, and the demand has no real connection to teaching quality. The price encodes the scarcity of the credential, which encodes signalling power in a downstream labour market. Lower the price and you damage the signal. This is why elite universities can’t compete on cost, even when their cost structure is utterly bonkers; their product is the credential’s positional value. Luxury goods and top-tier consulting brands work the same way.
Regulatory markets. Defence is the canonical case. You can’t sell a fighter jet to whoever wants one, and you can’t enter the market by being better and cheaper. The buyer is the state, the qualifying conditions are political, and the supplier list is shaped by considerations of national security and industrial policy that have no reflection in the price. See also: biopharma and large parts of healthcare, where reimbursement codes and FDA approval = a regulatory lattice that determines who gets to sell what.
Lock-in markets. This is most enterprise software. Once an organisation has implemented Salesforce or SAP or Workday, the cost of leaving has nothing to do with the licence fee. The cost of leaving is calculated on the data migration, the retraining, the integrations rebuilt, the consultants re-engaged, the workflows reverse-engineered out of years of tribal knowledge. The vendor’s pricing power tracks how deep they’ve embedded; and cloud platforms have engineered this into a science. Egress fees, proprietary services, bespoke APIs, and pricing tiers designed to discourage migration are all moats made of friction. The customer is buying their way deeper into a relationship that costs more to leave than to continue.
Procurement-theatre markets. Government contracting is the obvious example, but plenty of large-enterprise procurement runs the same script. An RFP goes out, and three vendors are invited to bid. One has been working with the buyer’s team for six months on a “discovery engagement” that has shaped the requirements document. The other two are wallpaper. The decision has already been made; all that’s left is for it to be laundered.
Credential markets. This = professional services and certain regulated trades. You can’t hire just any accountant for a public company audit; you hire from the Big Four because the buyer’s board needs a defensible name on the page. You can’t get just any law firm to handle the IPO; you hire one whose pedigree makes the deal more credible to the bankers. The credential does the work the price can’t. It pre-screens, on behalf of an audience that includes regulators, boards, capital allocators, and the financial press, who are themselves making pseudo-market decisions one layer up.
What pseudo-markets optimise for
A real market rewards someone for being right; a pseudo-market rewards someone for not being seen as wrong. The procurement officer who picks IBM and gets a mediocre outcome keeps their job. - the old adage that nobody was ever fired for hiring Big Blue holds. The procurement officer who picks the scrappy startup and gets a 20% better outcome looks like a hero if it works but a fool if it doesn’t. The expected value of the second option might be higher; but the variance of career outcomes for the human making the decision is also higher.
So they pick IBM, etc.
Stack this across any organisation, and you get a market that prefers safety to performance. Vendors compete on the ease with which their selection can be defended in front of an audit committee, a board, a journalist, or whichever shadow-judge looms over the buyer’s career. Performance is a hygiene factor and // or the cost of entry. The basis of competition is the buyer’s downside protection.
Once you see this, an awful lot of very strange behaviour resolves. Why do enterprise vendors charge so much for white-glove implementation services that cost them nothing to provide? Because the implementation is the deliverable that lets the buyer’s sponsor say “we’re being supported by experts” when the project drags on. Why do defence primes hire so many former generals? Because the relationship is the product. Why do universities chase rankings rather than improving teaching? Because the ranking is the credential’s denominator.
This is why vendors whose products are objectively inferior on every measure that should count somehow persist and survive. In a real market, they’d be punished out of existence; in a pseudo-market, they survive because their job has never been to win on the product. Their job has been to be the safe call. Safety, here, is a manufactured property, built through years of relationship work, conference sponsorships, analyst reports paid for under the table, and the accumulation of logos that signal to the next buyer that someone like them has chosen this before.
Competing inside one without pretending it’s real
The first move is being honest about what you’re selling. Whichever of the following the pseudo-market clears on, that’s the product: a status proxy, a regulatory position, a switching cost reduction, a procurement-defensible narrative, or a credentialling shortcut.
Pick the one that matches your category and build accordingly
The second is to abandon the buyer’s stated criteria and design for their actual criteria. The stated criteria is the scoring matrix. The actual criteria is: who will I be blamed by if this goes wrong, and which choice gives me the best story to tell that person? Your job is to be that story. In practice, this means case studies are indemnification documents; they give the buyer cover. Treat them as such and write them as such.
The third is to actively compete in whatever dimension your category’s incumbents have stopped competing. In a status market, that’s becoming the new prestige option, by making your scarcity costly to acquire in plain sight. In a regulatory market, it’s owning a credential or position the incumbents thought wasn’t worth pursuing. In a lock-in market, it’s offering the one thing they refuse to: ease of leaving. Make exit a feature. The buyers sick of being held hostage will find you, and they’re a real market hidden inside the pseudo.
The fourth is patience. Real markets clear in days; pseudo-markets clear in years. The sales cycle for a defence contract or an enterprise platform is not an inefficiency; it’s the time required for the buyer to construct the political case for your selection. Trying to shortcut this with growth-hacking energy will mark you as a blind // ignorant vendor who doesn’t understand how the buyer’s job works, which is itself disqualifying. Show up over time, and build relationships with the people who’ll still be there in three years.
The fifth move is structural: position yourself outside the procurement theatre rather than inside it. If the RFP is wallpaper for a decision already made, you don’t want to be a wallpaper bidder. You want to be either the one shaping the requirements document six months earlier, or the one selling to the executive who can override procurement, or the one whose category is so new that procurement hasn’t built a process for it yet. Procurement is the buyer’s defensive perimeter; you want to operate before it’s set up.
Coda
Real markets are rare // beautiful and they reward a certain kind of work. Pseudo-markets are most of what we call commerce, and they reward something else. Pretending the second is the first will exhaust you. Calling the second by its proper name lets you compete in it on its own terms, which is the only real freedom you ever get inside a system that won’t admit what it’s doing.
The price you see fails to be the price.
The market you’re in fails to be a market.
Once you accept that...