Monthly Archives: February 2012

Market Participant Numbers and ZOPA Capture

I was introduced to the idea of ZOPA – zone of possible agreement – before ever turning up to business school. It’s the range of prices for a transaction over which both parties still come out ahead, so should rationally still be happy to take part in the transaction.

For example, if I’m buying a house from you, you may know the minimum amount that you will sell for, and I know the maximum amount I will pay. If I am prepared to pay more than the minimum you will accept, then we can make a deal. Obviously, we both still want to maximise our own returns from the transaction.

In a market where one side of the transaction is highly concentrated – a monopoly or monopsony –  then the other side will have to accept the price dictated by the more concentrated side. The more concentrated side will be able to claim nearly all of the economic value created by the typical transaction.

How is price determined when there are large numbers of parties on both sides of the transaction? If the number of buyers suddenly doubles without changing the transaction volume, we would expect the price to go up, but by how much?

I don’t have an answer to this, and I don’t think there’s much literature on it. I wonder if it can be usefully modeled by a game allowing sellers to alter their offer price, at a cost, and making buyers pay a certain amount to view all the sellers in the market.