Surplus splitting strategy

By Katja Grace · August 31, 2012 12:42 pm · Comments (14) · ·

When negotiating over the price of a nice chair at a garage sale, it can be useful to demonstrate there is only twenty dollars in your wallet. When determining whether your friend will make you a separate meal or you will eat something less preferable, it can be useful to have a longterm commitment to vegetarianism. In all sorts of situations where a valuable trade is to be made, but the distribution of the net benefits between the traders is yet to be determined, it can be good to have your hands tied.

If you can’t have your hands tied, the next best thing is to have a salient place to split the benefits. The garage sale owner did this when he put a price tag on the chair. If you want to pay something other than the price on the tag, you have to come up with some kind of reason, such as a credible commitment to not paying over $20. Many buyers will just pay the asking price.

This means manipulating salient ways to split benefits could be pretty profitable. This means people should probably be doing it on purpose. I’m curious to know if and how they do.

Often the default is to keep the way the benefits naturally fall without money (or anything else ‘extra’) changing hands. For instance suppose you come to lunch at my place and we both enjoy this to some extent. The default here is to keep the happiness we got from this, rather than say me paying you $10 on top.

So in such cases manipulating the division of benefits should mostly be done by steering toward more personally favorable variations on the basic plan. e.g. my suggesting you come to my place before you suggest that I come to yours. A straightforward way to get gains here is to just race to be the first to suggest a favorable option, but this is hard because it looks domineering to try to manipulate things in your favor in such a way. Unless you have some particular advantage at suggesting things fast and smoothly, such a race seems costly in expectation.

If in general trying to manipulate a group’s choice seems like a status-move or dominance-move, subtle ways to do this are valuable. Instead of a race to suggest options, you can have a prior race to make the options that you might want to suggest seem more suggestible. For instance if you’d prefer others come to your place than you go to others’ places, you can put a pool at your place, so suggestions to go to your place seem like altruism. If you know a lot of details about another person, you can use one of them to justify assuming that a particular outcome will be better for them. e.g. ‘We all know how much John likes steak, so we could hardly not go to Sozzy’s steak sauna!’. None of this works unless it’s ambiguous which way your own preferences go.

On the other hand if your preferences are very unambiguous, you can also do well. This is because others know your preferences without your having to execute a dominance move to inform them. If their preferences are less clear, it’s hard for them to compete with yours without contesting your status themselves. So arranging for others to know your preferences some other way could be strategic. e.g. If you and I are choosing which dessert to split, and it is common knowledge that I consider chocolate cake to be the high point of human experience, it is unlikely that we will get the carrot cake, even if you prefer it quite strongly.

So, strategy: if it’s clear that you have a pretty strong preference, make it quite obvious but not explicit. If you have a less clear preference, make it look like you have no preference, then position to get the thing you want based on apparently irrelevant considerations.

Even if the default is to transfer no cash, there can be a range of options that are clearly incrementally better for you and worse for me, with no salient division. e.g. If I invite you over for lunch, there are a range of foods I could offer you, some better for you, some cheaper for me. This seems quite similar to determining how much money to pay, given that someone will pay something.

In the lunch case I get to decide how good what I offer you is, and you have to take it or leave it. You can retaliate by thinking better or worse of me. You can’t very explicitly tell me how much you will think better or worse of me though, and you probably have little control over it. Your interpretation of my level of generosity toward you (and thus your feelings) and my expectations of your feelings are both heavily influenced by relevant social norms. So it’s not clear that either of us has much influence over which point is chosen. You could try to seem unforgiving or I could try to seem unusually ascetic, but these have many other effects, so are extreme ways to procure better lunching deals. I suspect this equilibrium is unusually hard to influence personally because there’s basically no explicit communication.

There are then cases where money or peanut butter sandwiches or something does change hands naturally, so ‘no transfer’ is not a natural option. Sometimes there is another default, such as the cost of procuring whatever is being traded. By default businesses put prices on items rather than consumers doing it, which appears to be an issue of convenience. If it’s clear how much surplus is being split, a natural way is to split it evenly. For instance if you and I make $20 busking in the street, it would be strange for you to take more than $10, even if you are a better singer. This fairness norm is again hard to manipulate personally, except by making it more or less salient. But it’s a nice example of a large scale human project to alter default surplus division.

When there are different norms among different groups, you can potentially reap more of it by changing groups. e.g. if you are a poor woman, you might do better in circles where men are expected to pay for many things.

These are just a random bunch of considerations that spring to mind. Do you notice people trying to manipulate default surplus divisions? How?

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  • http://beeminder.com Daniel Reeves

    When possible I try to arrange explicitly for the Exquisitely Fair Outcome, where the surplus is split equally. Like if Alice wants to rent Bob’s spare bedroom, which he otherwise would leave empty, then you could argue that half of fair market value (what the room would go for on craigslist) is the fairest price. Alice and Bob each get an equal amount of money/savings from the arrangement.

    Another way to put it: What is each person’s BATNA? Pick the midpoint.

    • http://www.facebook.com/yudkowsky Eliezer Yudkowsky

      Who-wa?  The market value on Craigslist is already splitting surplus between the renter and the owner.  Otherwise the renter wouldn’t rent!  Charging half of that price – if the original price was half of surplus, which it’s not, because it will actually be the supply-demand market-clearing price – would give the owner 1/4 of the surplus.

      • http://beeminder.com Daniel Reeves

        Ha, yes, sorry, I was making a woefully unstated assumption: Bob and Alice are close buddies or family or something so Bob considers it no skin off his nose to have Alice take the spare bedroom. I.e., Bob’s BATNA isn’t renting it on craigslist to a stranger, but rather for it to sit empty.

        We actually think that way in our family. 🙂

        PS: I notice that I did technically state the assumption (“which he otherwise would leave empty”). But your confusion was quite justified!

      • http://juridicalcoherence.blogspot.com/ stephenrdiamond

        The market value on Craigslist is already splitting surplus between the renter and the owner.

        Again, you simply cannot ignore opportunity costs. The price on Craig’s list incorporates the renter’s opportunity costs. But, Daniel Reeves has stipulated that Bob would “otherwise would leave [the spare bedroom] empty.” Thus, Bob does not incur the opportunity costs of the typical Craig’s List renter (who is, after all, advertising publicly).

        At least to a first approximation, Daniel Reeves economic reasoning is sound; yours, Eliezer Yudkowsky, just misses his point.

  • Dean Jens

    It seems to me that I have seen situations like your busking example in which different participants had incurred costs, and there was some manipulation of which costs were reimbursable before the even split of the remainder, in which the more experienced busker is more likely to be reimbursed.  It’s worth noting that we sometimes have tacit fairness norms that conflict with our explicit fairness norms.

  • http://www.facebook.com/yudkowsky Eliezer Yudkowsky

    I have a hypothesis which says that whichever party gets to determine whether a transaction takes place – which is usually but not always the party with the market advantage, i.e. the seller if demand is high or the buyer if supply is high – takes 85% of the surplus and the other party gets 15%.  For example, 15% is about the royalty that most IP producers get in markets where the IP distributor is making this grave, gatekeepery decision, but in markets where you can take your pick of gatekeepers and they’re all eager to have you, the amount they charge you is closer to what an agent charges an author, again around 15%.

    This implies that in most modern markets where you’re the buyer, you’ll usually end up capturing a lot more of the consumer surplus than the people selling to you – which again sounds right to me!  I’d pay seven times as much for food if food was scarce, or seven times as much for a laptop if that was the only way to get a working laptop.

    • david3368

      Given that market advantages vary widely, if this really exists as a close-to-universal trend, it may be an artefact instead of how close two goods have to be before we stop judging them in different markets and instead assess them as substitutes for each other.

    • http://juridicalcoherence.blogspot.com/ stephenrdiamond

      I have a hypothesis which says that whichever party gets to determine whether a transaction takes place – which is usually but not always the party with the market advantage, i.e. the seller if demand is high or the buyer if supply is high – takes 85% of the surplus and the other party gets 15%… This implies that in most modern markets where you’re the buyer, you’ll usually end up capturing a lot more of the consumer surplus than the people selling to you – which again sounds right to me!  I’d pay seven times as much for food if food was scarce, or seven times
      as much for a laptop if that was the only way to get a working laptop.

      Just seven times as much for food? Make your food supply sufficiently tenuous, and I bet you could be coaxed to pay much more than seven times as much! You might well sacrifice your entire fortune for a morsel. So, does the difference between what you’d willingly pay when you’re starving and what you pay now measure your surplus from the transaction?

      Of course not. What you’re ignoring is your opportunity costs, just as Katja ignored her friend’s opportunity costs when Katja nudged her to have lunch exclusively at Katja’s dwelling. In your case, you ignore that to pay seven times as much for food could mean (if not for you, then for a more typical consumer) that you must forgo the laptop. The opportunity cost cuts deeply into your surplus.

      The result is that you vastly overestimate the surplus.

    • http://robertskmiles.com/ RobertSKMiles

      The thing that interests me about the 85:15 figure is how close it is to the 80:20 split generally found as the least fair split commonly accepted in the Ultimatum Game (Henrich et al 2004).

      The situations are very similar. In effect, your “whichever party gets to determine whether a transaction takes place” is equivalent to the UG’s “whichever party is making the ultimatum”.

  • http://juridicalcoherence.blogspot.com/ stephenrdiamond

    This means manipulating salient ways to split benefits could be pretty profitable.

    Not necessarily–only if there’s no equilibrium price because of market imperfections. If there is an equilibrium price, then when you prime the decision making so that your friend is nudged to have lunch at your house, your friend may choose instead to have lunch with katla, who isn’t given to dirty tricks.

  • http://www.facebook.com/profile.php?id=723726480 Christopher Chang

    The first consideration that comes to my mind here is low transaction cost, which favors price tags over negotiations.  I think cultures that encourage explicit negotiation over smaller-scale transactions destroy some value in doing so, though I realize that this is a difficult equilibrium to shift when what is a “smaller-scale” amount to me is in fact a big deal to locals.

  • Johnicholas Hines

    I had to puzzle out that the author, Katja Grace, apparently thinks the inconvenience of traveling to someone else’s house to eat weighs more heavily than the inconvenience of providing food, cleaning public areas, or doing the dishes.

    This article would be improved if that were made explicit..

  • Maximum Liberty

    I think that the fact of surplus-splitting becomes more salient the more deminsions the parties can use to split the surplus. The examples in the article mainly deal with a single dimension of price. Try examining the processes of a modern purchasing department and you will see innumerable instances of strategies around gaining more of the surplus in a negotiated setting. Examples:
    1. Providing the preferred form of agreement in a request for proposals.
    2. Requiring bidders to justify any deviations from the preferred form.
    3. Stating weights between various factors when those factors are clearly incommensurate (meaning that bidders must try to win in each factor being examined).
    4. During negotiations, having a multi-step process for any negotiated terms, where the pruchasing department must — with great reluctance — go back to the legal department for approval.
    And so on.

    Max

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