Today my daughter and I visited the popular Silk Market. We had been warned against it by some of our Chinese hosts, while others said that it was popular even with the locals. Having visited the more genuine local markets, however, we decided to leap into the tourist trap. In this photo, I am bargaining over some silk scarves, which I ultimately passed on. The Silk Market has much more than silk: watches, purses and packs, shoes, "jade" trinkets, etc.

If you are familiar with the problem of adverse selection, the Silk Market is a vibrant example of it. Many of the items are copies of famous designs. Close examination sometimes reveals the shortcomings of the goods -- for example, I picked up a Prada pack today and the imprint on the front was off center and crooked, and many of the "Pashmina" wool scarves are of such low quality that they threaten to tear in my hands -- but other items seem to be of good quality to the untrained eye. For example, many of the ties are attractive and the fabric looks very much like silk. Everyone knows that the products in the market are knockoffs, but the consumer is hard pressed to distinguish the good knockoff from the bad.

Of course, buyer and seller do not trust each other in the least. There is almost no reputational capital at stake in a market like this ... on either side of the deal. So when the seller says "trust me" (or some variation), all but the most gullible buyers just roll their eyes.

In this environment, the price drops toward zero very quickly. Some very handsome ties sell for about $1, for example. The sellers start the bidding much higher, of course, usually at $6 - $10 per tie. This, in itself, is an interesting experiment in anchoring. The temptation is to bargain from the initial asking price, which is a very bad indication of value. When approaching these negotiations, I counter the temptation to bargain from the initial asking price by offering a price based on my predetermined willingness to pay. This counteroffer would seem ridiculously low to the disinterested onlooker, but it usually ends up being very close the sales price. Most items that I purchased today sold between 10% and 30% of the initial asking price.

The Silk Market is more about the experience than the goods. I enjoy interacting with the vendors. While my daughter negotiated a particularly thorny purchase, I spoke with a neighboring vendor who wanted to practice her English. She had learned some English in school, but most of her English was comprised of the very limited vocabulary of the marketplace. My daughter's purchase completed, I wished the young woman the best and departed for the next shop. Now, thinking back, I wonder about her and how her life here will change over the next decade or two. Whether the "rich Americans" will continue to make their way to the Silk Market. Whether her life's work will consist of more than haggling with tourists over a few pennies.

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