Saturday, April 5, 2014

fair prices, non-pecuniary exchange, and bargaining costs

I've mentioned earlier my notion that the popularity both of focal prices in very non-competitive markets and of in-kind exchange (rather than the "usual" semi-monetary exchange) may reduce bargaining costs. The former story especially seems to work best where there isn't that much incomplete information; in particular, there should be a common belief that everyone is probably gaining at the likely focal point.  Attempts to negotiate or insist on a price different from the focal point are then interpreted as antisocial attempts to claim more of the surplus.

The case of non-pecuniary exchange, though, seems to be importantly driven by incomplete information, especially of how the thing being exchanged would compare (either in terms of cost or benefit) with dollars, and the fact that it's easier to find a focal point for in-kind exchange that seems obviously "fair" and mutually beneficial without the need for costly bargaining.

The main thought that I've been dwelling on more recently is that, while we often talk about "price discovery" as a function of the market, in both of these situations the cost of performing "price discovery" is being avoided. The market is not, in its ultimate sense, "failing"; the market ensuring that mutually beneficial trades take place, and in fact take place relatively efficiently. Instead of working out the price on the way to a solution to the ultimate problem, it simply routes around the hard part and jumps straight toward the end.