Two Economic Applications of Sympathy

Abstract

The notion of sympathy is analyzed in the setting of coordination between duopolists, and in the setting of the sale of a used car of possibly low quality. In both cases, the analysis suggests a number of empirical regularities concerning the effects of social interaction, physical distance, and psychological affinity. These regularities are confirmed by various historical accounts of collusion and by national survey results on used car purchases. We gain a greater understanding both of Adam Smith's observation that "the corporation spirit, the jealousy of strangers, the aversion to take apprentices, or to communicate the secret of their trade...[helps trades] prevent that free competition which they cannot prohibit by bye-laws," and of the reasons why "would you buy a used car from this man?" is such a telling question.

Keywords: Sympathy, duopoly, collusion, lemons problem, asymmetric information, market clearing

JEL Classification: L13, L15