1) It would result in more vulnerabilities found
This is fairly axiomatic. An open market increases the price of vulnerabilities which in turn increases the number of vulnerabilities found (unless you want to argue the ability to find vulnerabilities is inelastic for some reason).
2) It would result in more vulnerabilities being disclosed to the proper authorities rather than malicious parties
This is more debatable, but since there should always be significantly more incentive on good actors to prevent the exploit (i.e. the software creators and/or community) than bad actors, the good actors should always win the bid. Indeed, one could argue that it is only the prevention of free negotiation in the sale of vulnerabilities is the reason an exploit is ever sold to bad actors (e.g. if I found a Windows vulnerability and told Microsoft $10m or else, I'm a criminal).
3) It would ultimately increase the quality of software
Given more vulnerabilities are found and more vulnerabilities would be disclosed to good actors, the quality of software increases.
I believe that 2) is essentially the Coase theorem (http://en.wikipedia.org/wiki/Coase_theorem), but I am only an arm-chair economist. Also, I'm not sure that what Mitnick is doing actually is a free and open market for vulnerabilities.