Pirates vs ship-owners

Last friday’s edition (‘three baby camels‘) of the NPR planet money podcast contains a wonderful nugget about the economical aspects of how to determine the amount of ransom money that is to be paid to somalian pirates in order to get a hijacked ship back.

The story is based on the negotiations a Danish shipping executive (Per Gullestrup) conducted with someone representing a gang of Somalian pirates (Mr. Ali). The problem both parties are facing is that there are no other buyers or sellers for the merchandise (the hijacked ship) who would provide them with clues about the market price in markets with more sellers or buyers (in economics this situation is called a monopolist monopsonist bargaining problem).

In this situation exchanging information (with fellow pirates or fellow ship-owners) about prices paid for the release of other ships is one of the very few ways of speeding up the often time-consuming process of finding a price that is acceptable to both the seller and the buyer. According to Per Gullestrup the pirates are fairly good at that while the ship-owners are not (emphasis mine):

The owners are escalating the ransom payments because they are not really coordinating how they deal with pirates. The pirates on the other hand are extremely good at sharing information. And we know for a fact […] that they so have piracy workshops, that the pirates are actually meetings ashore and exchanging information.

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