Prices are usually set by what the next person would pay. <\/p>\n\n\n\n
In any transaction negotiation, there are 4 important numbers: buyer’s value, buyer’s next best offer (NBO), seller’s value, and seller’s NBO.<\/p>\n\n\n\n
The buyer’s or seller’s value is the benefit that each party receives from possessing a thing, measured in terms of money. This is important — it is why they are in the transaction! — but it is not usually a binding constraint. People are indifferent to transactions at this price by definition; this amount of money is equally useful as the thing.<\/p>\n\n\n\n
The buyer’s or sellers NBO is the next best alternative transaction for the thing, measured in money. For commodities, this could be an alternative source that is a little bit more expensive, a little farther away, a little bit worse, etc. For more distinct things, there may be more significant differences with unique valuations for each possible trader. The NBO is usually the binding constraint on a transaction.<\/p>\n\n\n\n
As an example, we can imagine selling a used guitar.<\/p>\n\n\n\n
The seller’s value is low since they are seeking a transaction. They may know a pawn shop will buy the guitar for 100$, their NBO.<\/p>\n\n\n\n
The buyer’s value is high since they are seeking the transaction. They may know a music store selling new guitars for 500$, their NBO.<\/p>\n\n\n\n
The transaction is like to take place between the buyer’s and seller’s NBOs, not at their personal values. If the buyer offers at less than 100$, the seller goes to the pawn shop. If the seller offers at more than 500$, the buyer goes to the music store. Any value between these is likely to be accepted.<\/p>\n\n\n\n
More complicated negotiations can be phrased in terms of manipulating subjective value and NBOs. E.g. this is an antique guitar that is super awesome and more comparable to 1000$ guitars at the collector’s shop. Here the seller is trying to increase the subjective value (it is super awesome, increasing the buyer’s value and absolute max price) and change the buyer’s NBO comparison (collector’s shop) increasing the likely transaction price.<\/p>\n\n\n\n
Everything is worth what its purchaser will pay for it.<\/p>Publilius Syrus<\/a><\/cite><\/blockquote>\n\n\n\n
Everything is worth what another purchaser would pay for it.<\/p>Timothy Crane<\/cite><\/blockquote>\n\n\n\n
<\/p>\n","protected":false},"excerpt":{"rendered":"
Prices are usually set by what the next person would pay. In any transaction negotiation, there are 4 important numbers: buyer’s value, buyer’s next best offer (NBO), seller’s value, and seller’s NBO. The buyer’s or seller’s value is the benefit that each party receives from possessing a thing, measured in terms of money. This is… Continue reading A thing is worth what someone else would pay.<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[],"class_list":["post-1","post","type-post","status-publish","format-standard","hentry","category-nonfiction","entry"],"_links":{"self":[{"href":"https:\/\/www.mirrorofimagination.com\/blog\/wp-json\/wp\/v2\/posts\/1","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.mirrorofimagination.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.mirrorofimagination.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.mirrorofimagination.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.mirrorofimagination.com\/blog\/wp-json\/wp\/v2\/comments?post=1"}],"version-history":[{"count":3,"href":"https:\/\/www.mirrorofimagination.com\/blog\/wp-json\/wp\/v2\/posts\/1\/revisions"}],"predecessor-version":[{"id":12,"href":"https:\/\/www.mirrorofimagination.com\/blog\/wp-json\/wp\/v2\/posts\/1\/revisions\/12"}],"wp:attachment":[{"href":"https:\/\/www.mirrorofimagination.com\/blog\/wp-json\/wp\/v2\/media?parent=1"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.mirrorofimagination.com\/blog\/wp-json\/wp\/v2\/categories?post=1"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.mirrorofimagination.com\/blog\/wp-json\/wp\/v2\/tags?post=1"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}