Friends Don\'t Let Friends Trade Value For Value?

In the course of a discussion regarding whether or not a large gaming community should officially sanction trading between its members, I noticed something curious that is in no way exclusive to this particular community. Many people seem to believe that when a friend sells something to another friend, it is somehow preferable, or more "friendly," if the seller sells the good for less than market value. The implication, of course, is that it is less friendly if the seller sells a good at or above market value.

I do not understand this preference. Or rather, I do understand it, but find it incoherent.

Suppose one friend decides to sell a car to another friend. If it is nice to sell a car to a friend for less than market value, why should it not be just as nice to buy a car from a friend for more than market value? In both cases, one friend is essentially giving something away for free to the other friend. Why does it matter whether this gift takes the form of extra money or extra car? And why does the trade need to be uneven in either case? Is there something less friendly about even trades compared to uneven trades?

I ask these questions with some knowledge of what the answers might be. Critics of capitalism like to point out the imbalance in power relations between the seller of a good -- often a large corporation, and the purchaser of a good -- often an individual consumer. These critics take this imbalance of power as evidence that the trade relationship is not mutual, but coerced. Of course, in labor markets, the power imbalance is reversed; the seller of the good -- labor -- is an individual, while the purchaser of the good -- the employer -- is considered more powerful.

I'm not interested in discussing the merits of this criticism here, but it is important to note that there is no such power imbalance when one friend buys something from or sells something to another friend. One reason why people think it is friendly for an item to sell for below market value, but unfriendly for an item to sell at or above market value, is because when the theory of power imbalance is applied to the concept of market price, we forget that the term "wage" means the same thing as "price of labor." No one wants to be overcharged, but no one wants to be underpaid either.

One additional reason might be that money is fungible while things like cars are not. Giving more car for less money is seen as giving a friend a nice deal, while giving more money for less car is seen as the sale of a car plus an unrelated gift of money.

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I've been thinking about

I've been thinking about this and I have an alternative hypothesis. I don't buy the "power balance always tilts to sellers" thesis. The "money is fungible, paying extra=charity" thesis is reasonably plausible especially considering that a friend might indeed "overpay" to a someone down on his luck but who nonetheless refuses direct charity out of pride. But, what I suggest is that there is a deadweight cost associated with trade between friends. If I sell my car to a stranger, caveat emptor applies and the onus is on her to satisfy herself that she isn't buying a lemon. If, on the other hand, I sell to a friend at market value I'm also granting a kind of unspoken guarantee. Basically, every little squeak or rattle and he's as likely to complain to me about it. The "friend's discount" goes some way to forestalling this. If he's getting a "bargain", he's less likely to complain about minor faults.

Micha, There are a couple of

Micha,

There are a couple of comments that may be worth considering.

1. Markets are made up of buyers and sellers of goods which have to be considered to be essentially interchangeable for anything like a market price to exist. Even if you have an identical car to one on a used car dealer's lot, it is not the same good as the expectations of the responsibilities and capabilities of the seller are different.

2. Market value is only one kind of economic value, a subset of exchange-value. Your primary car is most likely valued by you for its subjective use-value, the significance to you of the ends for which it can be used as a means. If you are selling a car to a friend, it is likely to not be, or no longer be, your primary car. This means that its subjective use-value to you has been diminished by the effect of the law of diminishing marginal utility. It can now only be used as a means to ends which have not already been achieved by the use of the primary car. This is true even if the two cars are identical in every respect. The first car, either one, satisfies more urgent ends and the other, only less urgent ends. Giving up either one of the two only gives up the satisfaction of the less urgent ends.

In the case in which you are selling a secondary car to a friend for his use as a primary car, there is likely to be an enourmous net benefit to be shared, even if it can not be quantified. In addition to whatever cash you receive, if any, you will have the subjective benefit of making a substantial enhancement to the well-being of your friend without leaving yourself much worse off at all.

Regards, Don

"Giving more car for less

"Giving more car for less money is seen as giving a friend a nice deal, while giving more money for less car is seen as the sale of a car plus an unrelated gift of money."

I think that's pretty much the whole point here, in many contexts money is not preferred as a gift.

Do you give mostly cash gifts?

When you're courting a woman you'll do better to give her flowers and candy than the cash equivalent, odd as that may sound to you.

Who's to say that this isn't

Who's to say that this isn't just another subset of value? Value is not completely monetary.

For example, if I'm selling a car to a friend, I may drop the price to be "friendly", but what I'm really doing is telling my friend that I value his friendship, and that because I do so, I would give him a monetary value to signify that emotional value.

At the same time, let's say I have a friend who runs a little grocery store. His prices are a little higher than market, while his goods are no different. I choose to patronize his business, paying a little more for goods, because I value his friendship, and wish to let him know that I want to see him succeed in his business.

Both situations are "nice", where either you sell to a friend for below market value, or buy for above market value. But market value is an aggregate. You're not buying or selling for below your subjective value, or you wouldn't complete the transaction with your friend. You're just factoring in the value of goodwill, and assigning a monetary price to that.

In practice, however, an

In practice, however, an honest car sale between friends ends up getting both friends a better deal than they would were they to use a middleman. If the buyer thinks of "market value" as what a used car salesman would charge her for the car, she is paying less than market value. If the seller thinks of "market value" as what the salesman would pay her for the car, she is making above it.

There is an implicit (and

There is an implicit (and invalid) assumption here which is that if an individual is willing to sell an item to another, than his current state is a higher utility state than the buyer. Turn the problem on its head. If I were flat broke and needed to sell my car to a rich friend, would it be "friendly" for the exchange to take place at below market value? If you agree that it is not in fact friendly, then the assumption is invalid, and the problem appears to break down into a question of combined utility. If you assume decreasing marginal utility, some kind of concave utility curve, then tilting the exchange in favor of the friend on the lower end increases the total combined utility.

As for when the assumption is invalid in the other direction, say when the rich man may be richer than AND deem an item more valuable (a one-seater sports car for example). In those instances no exchange would even be considered and there could be no question of friendliness.

Andy P, in your example,

Andy P, in your example, couldn't your rich friend just give you a few bucks?

digamma, I think the

digamma,

I think the middleman isn't a fair comparison. I think the question is selling to a friend vs. selling on the private market. I.e. listing it in AutoTrader or on Craigslist. Obviously selling to a used car lot will bring in less money, as they need to be able to resell at a profit (you're trading the ease of selling to a known buyer for the hassle of searching for a buyer, taking time and possibly money).