Market Discipline
Categories: Financial Theory
Parents use discipline to get children to behave the right way. Send the kids to their rooms without supper. Take away their phones. Make them listen to their grandparents tell them stories about the 1960s. Spank them. Well, spanking these days is more for parents to do with each other. But you get the point: discipline shapes behavior.
With market discipline, it isn't a parent handing out the punishment. It isn't even a parental figure, like a regulator or government decree. It's the market.
A company can't waste too much cash, or it will start losing money and eventually go bankrupt. A firm has to keep getting more and more productive in order to get more and more profitable. A competitor has to keep innovating, or it will fall behind its rivals and ultimately go out of business.
That dynamic defines market discipline. The market forces (supply and demand, competition, profitability, etc.) keep the behavior of companies in line.