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
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Notes -
In a pure, mathematically perfect, game theory bilateral monopoly, any distribution is a Nash Equilibrium, making the actual distribution arbitrary and impossible to deduce logically. Any offer someone makes and commits to would be irrational to refuse, but any counter-offer is similarly irrational to refuse, although I suppose if you modify the game with some sort of negotiation system attached and maybe some semi-rational actors you could come up with some sort of converging equilibrium.
In the real world, nothing is a perfect bilateral monopoly isolated from other economics, in which case the asymmetry of the breaking of this monopoly is likely to have a very strong impact on the negotiation. Labor pretty much always has value, if nothing else than the fact that sitting around relaxing is typically more enjoyable than working (not literally always though), and there are plenty of other jobs someone could take. So if there's a resource A that is completely worthless without skill B, and person B has skill C that's useless without resource A, you still don't have a perfect bilateral monopoly because person B could go do something else even if it doesn't use that skill. This gives person B an advantage in negotiations. Or maybe person B can extract value from A with 99% efficiency and some random Joe off the street can extract value with 5% efficiency. That gives person A an advantage. Unless the bilateral monopoly is truly perfect, both the resource and the skill/labor are completely useless without each other, the imperfections in the monopoly are going to provide pressure on the negotiating price. Internal factors of the people such as their wealth and utility functions may also play a role, as you point out, but I think the asymmetries in the monopoly are going to be a bigger factor.
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