8 Does Market Theory Apply to Biology ?

Traditionally, market models in economics describe interactions in which the commodities traded are subject to complete contracts that are enforceable at no cost. Such contracts do not exist among other animals. In conventional economic models, there is also no account of who meets whom, what the traders know, and how they settle on a transaction, whereas these aspects play a major role in biological market models. From this point of view, the scope for applying market theory to biology appears very limited. Recent developments in economics, however, may allow for fruitful interdisciplinary cooperation. These developments include what one leading economist termed “the abrogation of the law of supply and demand” accomplished by the introduction of principal-agent models, based on the incomplete nature of contracts and the traders’ limited information. There is an important convergence of thought in both disciplines, and biologists have recently identified a variety of interesting examples beyond the basic mating market. Some of these examples resemble labor markets and may be illuminated by principal-agent models. A look at the mating market shows that adopting an economist’s perspective provides a comprehensive model of the market, the components of which are now well understood by biologists. Finally, there are striking parallels between the signaling games studied in biology and economics, the value of education and the peacock’s tail having much in common. INTRODUCTION:WHYBOTHERWITHMARKETS? When we buy a basket of apples, the interaction with the farmer is mutually beneficial: we receive a commodity while the farmer gets money in return. Mutual benefits alone, however, are not sufficient to explain cooperation. We tend to refuse a particular trade if we know that a better deal can be obtained elsewhere and is worth the effort of moving and searching. Similar market phenomena seem to exist in the nonhuman animal world. When a female mates with a male, she receives sperm while the male “cashes in” on the eggs that his sperm fertilize. The mutual benefits, however, do not imply that they are worth the trade. Females often refuse a particular mate if superior partners are available. The preferred partners might offer “nuptial gifts,” more valuable sperm, lower risk of picking up sexually transmitted diseases, or better abilities to care for the offspring (if this can be expected at all). Ever since 1838 when Charles Darwin read the classical economist Thomas Malthus, the emergent properties of competitive interactions have been prominent in biological thinking. The analogy between animal mating and human trade led much later to the metaphor of mating markets in behavioral ecology. Recently, a more general field of research on biological markets has emerged (Noë and Hammerstein 1994, 1995; Schwartz and Hoeksema 1998; Noë et al. 2001; Simms and Taylor 2002). The reason behind this broadening in scope is that partner choice plays an important role in social interactions other than mating (Hammerstein, Chapter 5, this volume) and that many cooperative exchanges take place within and between species. In songbirds called Lazuli buntings (Passerina amoena), for example, the following exchange seems to take place: territorial males give juvenile-looking males access to their high-quality territories1 and are compensated through offspring benefits that result from copulations with the juvenile’s mate (Greene et al. 2000). The juvenile-looking males are yearlings. In general, yearlings differ markedly in their plumage color, ranging from very dull to bright (adult looking). Color plays a crucial role in social partner choice. Adult males behave very aggressively toward brightly colored yearlings. In contrast, they sometimes show extreme tolerance toward dull-looking males, who then use this opportunity to settle near the adult in its high-quality habitat. Greene and his collaborators interpret this as a cooperative relationship, whereby the dull yearling benefits from the habitat quality as it allows him to attract a female and produce offspring with her. Rather than posing a threat to the adult, the presence of the dull male makes it possible for the adult to obtain extra-pair fertilizations — a mutually beneficial trade (revealed by DNA fingerprinting). Young birds with bright plumage coloration probably compete for territories as if they were adults. Green et al. report that both the dullest and the brightest yearlings generally obtained high-quality sites. It would be difficult to understand this empirical result without considering the trade among males in the social partner market. Noë and Hammerstein (1994) analyzed a similar scenario for purple martins. Experimentalists have conducted several other market studies in which social partnerships are observed. For example, Bshary investigated the relationship between cleaner fish and their “customers” (i.e., other fish from which they remove ectoparasites). Cleaners live in coral reefs and have customers from the immediate neighborhood as well as from the open sea. Local customers for which long-distance moves are costly are cleaned less well than long-range 154 S. Bowles and P. Hammerstein 1 We refer to territory in a broad sense as the habitat controlled by the adult male. travellers, who can easily switch between cleaning stations and thereby exert partner choice (see Bshary and Noë, this volume). This is exactly what one would expect from the economic theory of monopolistic competition: buyers with few alternative sources of supply will have less advantageous transactions than those who can shop around. Biology does not lack market examples, and it is obvious that many important insights can be gained if the market is properly reflected in studies of cooperation. Biologists have only begun, however, to develop a general market theory, and thus it seems important at this stage to ask what might be learned from economics. At first glance, the scope for simple interdisciplinary “trade” may seem rather limited. Traditional concepts of economic markets appear to be particularly unsuitable for biologists. A cursory look at biological mating markets confirms this view. Some outstanding puzzles in biological market theory, however, demonstrate that there is some convergence of theory development in biology and economics. MARKETS IN BIOLOGYAND ECONOMICS ARE NOTTHE SAME The recent success of the market analogy in biology comes somewhat as a surprise to economists, for standard market models in economics appear to be a poor template for studying interactions among nonhuman animals. There are three reasons for this: • First, canonical economic agents deploy extraordinary cognitive capacities unique to humans in pursuit of their self interest. By contrast, biological market traders at most perform an “as if” fitness maximization, and this is the product of population-wide dynamics, not of intentional behavior. • Second, conventional economic models determine prices and other equilibrium outcomes in markets without representing the actual interactions among traders. In contrast to biological market models, there is no account of who meets whom, what the traders know, and how they settle on a transaction. In this sense, there is not even an economic theory of the price-setting process. • Third, most market models describe interactions in which the goods and services traded are subject to complete contracts that are enforceable at no cost to the exchanging parties. This means that the explicit terms of the exchange cover all aspects of the trade of interest to the trader, and, once decided upon, these terms are not subject to cheating. Human contracts of this type are unique in nature. As a result, conventional market models are silent on issues of considerable interest to biologists, including the determinants of bargaining power, how cheating is controlled, how the terms of a trade are determined in a biological exchange, and how power can be exercised in a highly competitive environment Does Market Theory Apply to Biology? 155