Here's an essay I wrote. It's mostly sketching out the general case without going into case studies. I realize people like to bring things down to reality but it didn't feel right for this essay.
Arthur has an oil well. Caleb has the skill to refine the oil. Without the oil the skill is useless. Without the skill to refine the oil the oil is useless. How do they share the profits that come from selling the refined oil? How do they negotiate the split of the profits?
One might imagine that Arthur could choose from many oil engineers and select the one that will give him the best deal, and Caleb could find the oil well owner that will give him the best deal, and supply and demand would meet in the middle through ordinary market forces. In practice this isn’t always how things go. Sometimes one side doesn’t have any other potential partners. Sometimes, for one reason or another, neither side does. If there’s only one seller and one buyer, that’s known as a bilateral monopoly. In the case of the oil well it’s less a matter of buyers and sellers and more about two business partners who can’t profit without the other.
In such cases, negotiation turns into a game of chicken. If Arthur offers Caleb a split that Caleb thinks is unfair, Caleb can refuse it, in which case the oil stays in the ground and neither side gets paid. Likewise for an unappealing deal that Caleb offers to Arthur. If one side wants 95% of the profit, the other side could reject the deal, even if it means no profit for either of them. That’s not irrational, it’s just the only way to exercise leverage in such a situation.
So far so obvious. But here’s the thing that I want to call attention to: in a simplified model, the deal that will go through is one where the wealthier business partner gets a larger cut of the profits. In a market with only one buyer and one seller, the side with the highest willingness to cancel the deal has the most leverage, and the richer side (theoretically) needs the money less. Horribly ugly, but also utterly reasonable. In many cases we may wish it were otherwise, but if the poorer business partner cancels the deal too often out of indignation and pride that’s not so great either.
It might seem like the situation I described with only one buyer and one seller is unlikely to occur, but consider the situation in Venezuela under Hugo Chavez: Chavez couldn’t fire all the domestic oil engineers and replace them without greatly hampering oil production and disrupting the workings of the entire country, and the oil engineers couldn’t go work somewhere else without uprooting their lives and going to an entirely different country. Venezuela didn’t have a monopoly on oil, and the oil engineers didn’t have a monopsony on oil engineering, but the costs for switching partners were high enough that somewhat similar effects were in play, I think.
Mood board:
The national pride of poorer countries as a recurring factor in geopolitics
Oil negotiations between Iran and Britain in the 1950s
Hugo Chavez firing all the oil engineers in Venezuela
Hollywood Strikes
The likelihood that both sides will think that what they bring to the table in the deal is the key ingredient in the process and therefore more valuable.
Additional thought:
What would it look like if the richer side needed the money more? Could that ever happen? Maybe there could be situations where the richer party has “farther to fall” than the poorer party. For instance, if the richer side of the equation has a lot of valuable businesses that need capital injections in order to stay afloat, and the poorer side of the equation can just continue with a meager but stable lifestyle.
https://absenceofweather.substack.com/p/fair-and-unfair-in-bilateral-monopolies
Jump in the discussion.
No email address required.
Notes -
Company and a critically needed employee? (strictly speaking they need relevant expertise, not money). If entire factory is stopped and you accrue millions in damage per day then emergency hiring of froggozlle foobar twitcher is going to be expedited and outrageous wage is going to be spend if needed. I guess that producer of train is holding you hostage or something then similar may apply (one such case was kind-of-public recently, though no idea how much they got paid - in this kind hackers could consider playing with train to be part of payment :) ). My kind-of-dream is to be hireable for job where I am paid several millions to tweak some toggles for few minutes based on decades of my experience.
On more replicable scale it sort of happens with programmers. There is a reason why programmers are being better paid than say cleaners.
That's not due to bilateral monopolies though. That's just normal supply and demand. Bilateral monopolies would be more like United Autoworkers or other heavily unionized jobs.
With programmers you can get some degree of bilateral monopoly power, where a long-time employee of a firm has a lot of firm-specific knowledge, which is very valuable to the firm but not to anyone else. This the programmer has something unique to offer the firm, and the firm is the only one willing to pay for it.
This is probably more likely to happen at non-tech firms, as tech firms are better at making sure that no crucial software is exclusively maintained by one person.
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link