Are we assuming that the two players have perfect knowledge of each others’ prices? Because if so, it seems to me that the price is a simple 500k (minus epsilon). If A has something that B values at that price, and that can’t be gotten anywhere else, he will charge what the market will bear; and the market will bear 500k, because that’s what the phrase “B values the access at 500k” means. If B is not in fact willing to pay that sum, on the grounds that A’s reservation price was much lower, then he did not genuinely value the access at 500k.
If the two parties don’t have knowledge of each others’ prices, then presumably A makes some offer greater than $5 and B accepts it, or vice-versa. In this case the price is basically random. It gets higher as you increase A’s knowledge of B.
If A has something that B values at that price, and that can’t be gotten anywhere else, he will charge what the market will bear; and the market will bear 500k.
Try:
If B wants to buy something that A obtained at a certain cost, and that can’t be sold anywhere else, he will pay what the market will bear; and the market will bear $6.
If A refuses to pay $500k, B gets nothing. If there were multiple buyers and A had the highest reservation cost, your answer would work and the problem would be boring.
But as the reversal shows, if B offers $6, A would take it, under similar reasoning. That’s what it means to say it costs A $5. No one is going to make a higher competing offer, because no one else can even legally buy the product (and the product is a legal construct, so that means no one else can buy the product, period). It would make as much sense for B to pay $499,999, as it would for A to accept $6.
A has other sources of money
This is immaterial. A has no other use for the easement—he either sells it to B (losing $5), or it doesn’t exist (0$). Conversely, B could simply not build a house on her property ($0). The fact that each has other things they can do with their life is immaterial to the transaction at issue, because that transaction has no alternatives—either A & B come to an agreement, or they both get nothing.
Ok, as a point of game theory you’ve convinced me. As a matter of human psychology, I think A has B over a barrel, although possibly not a half-million-dollar barrel. Although A gets nothing if B refuses to buy, A is not the one who wants a specific, very valuable change in the starting situation. B is the one who wants the status quo changed in a specific way; he has, so to speak, the burden of proof.
Although both parties have an opportunity cost from not making a deal, it seems to me that the opportunity cost “I don’t get to do these specific things I had planned on” will weigh more heavily in a human mind than “I don’t get some amount of free money, which may be small”.
As a matter of psychology, the two are neighbors. They probably work it out amiably, and A probably doesn’t end up charging much because it doesn’t cost him anything, and because B will get really, really angry if A insists on some high price. Also, practically, if B is so inclined, he can punish A by litigating the issue—it’ll cost A money and is just an unpleasant experience. It’ll cost B the same, but we know that real people are willing to pay money to punish those they find uncooperative.
If these were two competing businesses, or if involved business more generally, I wouldn’t be surprised if A did try to take advantage of his position. But the actual fact is that humans are not homo economicus, and will generally not bend other people over a barrel in such situations. If the costs to A were higher, it’d be a very different story.
Or perhaps I have an overly optimistic view of average human behaviour.
Are we assuming that the two players have perfect knowledge of each others’ prices?
A and B know each others costs and values.
That is a yes.
If A has something that B values at that price, and that can’t be gotten anywhere else, he will charge what the market will bear; and the market will bear 500k, because that’s what the phrase “B values the access at 500k” means.
This is not the case. In this scenario there is no special privilege for the resource that happens to be the service over the resource that happens to be money—the ‘seller’ doesn’t arbitrarily get to dominate.
no special privilege for the resource that happens to be the service
I don’t understand why this should be the case. Presumably A has other sources of money, but B has no other sources of access; unless you are specifying otherwise, there is an obvious asymmetry. If the situation is intended to be symmetric, the example is a bad one; it is cross-grained to well-established intuition about how money works.
Are we assuming that the two players have perfect knowledge of each others’ prices? Because if so, it seems to me that the price is a simple 500k (minus epsilon). If A has something that B values at that price, and that can’t be gotten anywhere else, he will charge what the market will bear; and the market will bear 500k, because that’s what the phrase “B values the access at 500k” means. If B is not in fact willing to pay that sum, on the grounds that A’s reservation price was much lower, then he did not genuinely value the access at 500k.
If the two parties don’t have knowledge of each others’ prices, then presumably A makes some offer greater than $5 and B accepts it, or vice-versa. In this case the price is basically random. It gets higher as you increase A’s knowledge of B.
Try:
If A refuses to pay $500k, B gets nothing. If there were multiple buyers and A had the highest reservation cost, your answer would work and the problem would be boring.
But as the reversal shows, if B offers $6, A would take it, under similar reasoning. That’s what it means to say it costs A $5. No one is going to make a higher competing offer, because no one else can even legally buy the product (and the product is a legal construct, so that means no one else can buy the product, period). It would make as much sense for B to pay $499,999, as it would for A to accept $6.
This is immaterial. A has no other use for the easement—he either sells it to B (losing $5), or it doesn’t exist (0$). Conversely, B could simply not build a house on her property ($0). The fact that each has other things they can do with their life is immaterial to the transaction at issue, because that transaction has no alternatives—either A & B come to an agreement, or they both get nothing.
Ok, as a point of game theory you’ve convinced me. As a matter of human psychology, I think A has B over a barrel, although possibly not a half-million-dollar barrel. Although A gets nothing if B refuses to buy, A is not the one who wants a specific, very valuable change in the starting situation. B is the one who wants the status quo changed in a specific way; he has, so to speak, the burden of proof.
Although both parties have an opportunity cost from not making a deal, it seems to me that the opportunity cost “I don’t get to do these specific things I had planned on” will weigh more heavily in a human mind than “I don’t get some amount of free money, which may be small”.
As a matter of psychology, the two are neighbors. They probably work it out amiably, and A probably doesn’t end up charging much because it doesn’t cost him anything, and because B will get really, really angry if A insists on some high price. Also, practically, if B is so inclined, he can punish A by litigating the issue—it’ll cost A money and is just an unpleasant experience. It’ll cost B the same, but we know that real people are willing to pay money to punish those they find uncooperative.
If these were two competing businesses, or if involved business more generally, I wouldn’t be surprised if A did try to take advantage of his position. But the actual fact is that humans are not homo economicus, and will generally not bend other people over a barrel in such situations. If the costs to A were higher, it’d be a very different story.
Or perhaps I have an overly optimistic view of average human behaviour.
That is a yes.
This is not the case. In this scenario there is no special privilege for the resource that happens to be the service over the resource that happens to be money—the ‘seller’ doesn’t arbitrarily get to dominate.
I don’t understand why this should be the case. Presumably A has other sources of money, but B has no other sources of access; unless you are specifying otherwise, there is an obvious asymmetry. If the situation is intended to be symmetric, the example is a bad one; it is cross-grained to well-established intuition about how money works.