Competition and the financial markets: Financial sector conditions and competition policy

Financial instruments that are traded on financial markets differ from ordinary goods and services in a number of dimensions. They represent claims on uncertain future streams of income, whereas goods provide either instant services or future but relatively certain streams of services (in the case of durable goods). The prices of financial instruments are often more volatile, due to their sensitivity to changes in the expectations of the uncertain income stream. The role played by expectations in the pricing of claims on future streams of income also makes financial markets more prone to the development of bubbles. Financial market bubbles may arise when market expectations — the anticipation that a future stream of income will increase — lead to an immediate increase in the price of the asset, which may reinforce market expectations that the underlying stream of income will further increase in value.