Friday, February 17, 2006

Smith's Analysis of Bargaining Redundant?


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An interesting suggestion from IT specialist, Dana Gardner, that aims to revolutionise buying and selling (he claims for everything, from 25c packets of pins to, say, a transport system). Its focus is on the buyer acquiring knowledge through IT facilities that reveal everything the buyer needs to know (and not just what the seller decides to inform the buyer).

Hence, references to the future ‘redundancy’ of Adam Smith, the Chicago School and eBay:


The vision is that anyone, anytime, just about anywhere can get all the relevant information they need when they are seeking just about anything.

A secondary aspect to the vision is that once a prospective seeker has the full knowledge and visibility into what it is they want to purchase, that they can immediately act on it — to make the bid or outright purchase, same as anyone else, no strings attached, to gain from the investment fairly and productively as soon as possible at any scale.
With due respect to Adam Smith, the Chicago School, and eBay, a lot of this vision is already in place and has been an ongoing process of market forces refinement for hundreds of years. However, it is still not comprehensive, easy, nor complete. Feedback loops only exist within closed systems. The playing field is still not level. In order to work, the realization of the vision needs to breed outside of any closed command-and-control structure. Yet it needs to be organic globally.


Again, this notion of eliminating friction in the process of market activity is ages old. But the means of attaining friction-less and enlightened commerce at low or no cost to the masses remains revolutionary. The pillars to support this vision of a monumental smear of grease on economic skids are in place, they are just not coordinated. The rub remains how
to coordinate and be organic, too, so that no one games the game
.”

Comment:

Students of negotiation should recognize the mathematical equivalent of Gardner’s vision in the John Nash “Bargaining Problem” (Eonometrica, 1955). If each party has perfect information of each other’s preferences, bargaining skills are assumed equal (eliminated), and their numerical utilities are known to each of them, then the optimal bargaining outcome would be the exchange that maximizes the product of their net gains in utility.

No bargaining process is described because it is assumed away; only the shape of the outcome is specified.

As with Nash, it does not take account of the bargainer’s uncertainty a priori of which point in the range of the acceptable solutions (exchanges) is consistent with which point in the range of the acceptable solutions of the other party. Bargainers think in ranges not price points, except for items of trivial cost. When decisions are made by teams of people(as they are in large corporations) their preferences vary in complex possible combinations.

As Gardner puts it: “The rub remains how to coordinate and be organic, too, so that no one games the game.” Precisely: Back to Smith, Chicago School and eBay!

It remains a fact that no matter how low a price buyers purchase something, they still prefer a lower price; no matter how much seller sells something, they still prefer a higher price. Perfect competition copes in theory and on the blackboard. It has not yet eliminated Smithian negotiation (‘give some of what I want and I will you some of what you want’) ("Wealth of Nations" WN I.I.2)

Automating auctions by repetitive plays does not resolve the negotiating dilemma. But not to be negative, Dana Gardner has suggested something worth looking at. A good class case?
Meanwhile ‘gaming the game’ is likely to continue.

Read Dana Gardner’s article, “E-commerce, meet your successor: knowledge commerce”:
http://blogs.zdnet.com/Gardner/index.php?p=2256

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