I’m really enjoying this textbook on price theory by Deirdre Mccloskey. The explanations are lively and interesting. The book is available on-line at no cost.
As mentionned in yesterday’s post, knowledge of bargaining techiniques for a good being transacted in the marketplace is valuable to market participants. McCloskey provides this example.
But economists have not discovered very much about what constitutes exceptionally subtle bargaining. There are profound reasons why this is so. Suppose that some bargaining technique were known to be useful when employed by the Soviets-such as threatening to abandon bargaining altogether in a week if the Germans do not accede by then to the terms demanded. The Germans would come to understand this. The Germans would use it themselves. Its usefulness to the Soviets, therefore, would vanish. In general, any knowledge that the analyst of the situation acquires can be expected to be acquired by the participants. They will alter their strategies in view of the knowledge, making the knowledge obsolete. The Soviet bargainers make a “last” offer. The German bargainers know that the offer is insincere (that there are quotation marks around “last”‘) and ignore it, making their own “last” offer. But the Soviets know that the Germans know that the Soviets “last'” offer is insincere and prepare a “real” last offer. But the Germans know that the Soviets know that the Germans know that the Soviets’ “last” offer is to be replaced by their “real” last offer, itself insincere. And so forth.
Chapter 5 – Trade, page 95
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