Economics and Evolutionary Psychology

by Chris_Leong 16d2nd Nov 20191 min readNo comments

12


This article provides game theoretic reasons for acting in ways that may seem naive from the standard economic point of view.

Key quotes from the article:

"As a member of a hunter-gatherer band, you engage in a variety of transactions with your fellows, trading goods and services—food, sex, support in intra-group conflict, and the like... In this world all markets are thin—it is, after all, a small band—so the typical transaction is a bilaterial monopoly bargain.

Assume an environment sufficiently stable so that, for some transactions, there are “usual prices.” Those prices must be within the bargaining ranges of both buyer and seller, since otherwise the transactions would not occur. The environment is not, however, perfectly stable. Sometimes the circumstances of one party or another shift his bargaining range—the range of terms for which the transaction is in his interest.

You are a buyer whose current circumstances make the good much more valuable to you than usual, widening the bargaining range. If you could somehow commit yourself not to pay more than the usual price, you, rather than the seller, would get the increased benefit from this transaction. One way to do so is to be emotionally programmed to resent any increase above the usual price—resent it enough so that the humiliation of being “cheated” will outweigh the gain from the transaction.

As in any bilateral monopoly game, the argument works both ways. If the seller could somehow commit himself not to accept less than your reservation price, he would be the one to pocket the gains from the trade. There is, however, an important difference between your situations. You know the usual price and, assuming the special circumstances affect only you, know that it is probably within the seller’s bargaining range. So your commitment strategy is unlikely to commit you to a price outside the bargaining range—which would make the transaction impossible. The seller does not know your reservation price, so if he commits himself to his guess at what you are willing to pay he may choose a price at which the transaction can not occur.

... What about the situation where the seller’s costs are unusually high, making him unwilling to sell at the usual price? If the result is to eliminate the bargaining range, no transaction will or should take place. But if the seller’s cost is lower than the value to the buyer, either because the special circumstances affect both in similar ways or because the increased cost is still within the usual bargaining range, a buyer’s commitment not to pay more than the usual price results in an inefficient bargaining breakdown.

There is a solution to this problem. A seller charging an unusually high price can defend himself against the buyer’s commitment strategy by offering to show the buyer that his costs really are unusually high, that he is really, and not only strategically, unwilling to sell at the usual price. From that we get the conventional view of pricing that economists find so frustrating and wrongheaded—as the outcome of bargaining between buyer and seller, with each required to justify any deviation from past prices."

12