Monday, May 14, 2007

What is The Difference Between Buyers and Sellers?

Almost none.

To illustrate, consider barter: If I give you a potato in exchange for an orange, then who is the buyer and who is the seller? Now, if I gave you a potato in exchange for a slip of paper (or a credit card number) promising an orange next week, then, in the strictest sense, I am the seller and you are the buyer because I gave you a potato in exchange for an IOU; i.e., in exchange for money.

So, this simple example shows that there are two minor differences between sellers and buyers:

1. If a potato is exchanged for an IOU then it is "sold" by me and "bought" by you -- even though this could also be thought of as bartering the potato for an IOU, or bartering for money.

2. The terms "bought" and "sold" help define the direction of the good (and its reverse; the direction of the money).

(As an aside, this also related to gambling. If we exchange the potato and the orange today, we are betting that the relative value each item will not increase tomorrow.)

In the popular culture, however, buying and selling usually have false definitions. Instead of one being seen as the mirror of the other, the buyer is usually a selfless and relatively powerless consumer battling against a "greedy" seller who can dictate terms at will.

In fact, there are three categories of buyer to seller arrangements:

1. Many-to-One. This refers to many individual buyers trading with a handful of sellers. Generally, this includes consumers trading with airlines, insurance companies, banks, pharmaceutical companies, auto dealers, etc., etc., etc. In the popular culture, this category is often thought of as the only buyer/seller relationship.

2. One-to-Many. This is where many sellers trade with a few buyers. The best examples are companies that derive most of their sales from very few customers, such as Proctor & Gamble with Wal-Mart, franchisees and and franchisers, ComAir with Delta Airlines, Tyson Chicken and McDonald's, etc.

3. Many-to-Many: Lots of sellers and lots of buyers. eBay is probably the best example, although real estate and used cars are also fairly good examples.

4. One-to-One. This is where two separate entities work almost exclusively with each other. It's not common, but labor unions come to mind. Companies buy labor from a single union local, and the union local sells labor to that single company (although its influence is usually industry-wide).

For some reason, popular sympathies are neutral in Examples (2) and (3) -- but lean heavily towards the buyer in Example (1) and the seller in Example (4).

For example, in (1), consumer boycotts against specific companies are often considered appropriate, but company boycotts against specific consumers are never considered appropriate -- and are in fact illegal. The only exception to this, when the rules are actually reversed, is where the seller has a total monopoly; i.e., the seller is the government. In that case, boycotts against the seller are extremely illegal (just ask the IRS) and boycotts against individual buyers are the law ("affirmative action" is a good example of a single-seller government might boycott whites, males, etc. once a quota is reached).

Objectively, though, the differences that exist between any traders are related to market conditions (e.g., scarcity, preferences, alternatives, etc.) and have nothing to do with who the "buyer" and who the "seller" is. But when politicians speak to the "many", they use the language that the "many" understand; i.e., the speak to those in Example (1), where there are a lot of people in the "many", and nothing unites them better than inciting them against a common enemy -- and an "enemy" that is very easy to identify.

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