A two-factor market is essentially just a market is one in which two parties must seek each other out to make trades. Say I want to make a new website-hosting platform to compete against WordPress. Well, just making the platform isn’t enough. Even if I create a platform that is objectively better than WordPress for both readers and creators, neither side will spontaneously start using the platform unless they think that the other side will as well.
A content creator has little incentive to move over from WordPress to my platform, because there are no readers there. And readers have little incentive to check out my platform, because there are no content creators using it. In other words, there exists a signaling equilibrium around WordPress as places for finding and creating online content. Bloggers come to WordPress because they know that it is a good place to find lots of readers, and readers come to WordPress because they know it is a good place to find lots of blogs.
This is a natural result of a two-factor market, and can result in some unfortunate suboptimalities. For instance, I’ve already suggested that an objectively better website-hosting platform might never become widely utilized, because of the nature of this equilibrium. A company like WordPress can exploit this by not investing as heavily in the quality of their product as they would have if the market was perfectly competitive.
Sexual selection looks like it has some of these features. If female birds on average favor a certain streak of red on the head of the males of the species, then we should expect that both this streak of red and the favoring of this streak will increase over time. Once streak-of-red has become a dominant sexually-selected-for trait, it is much harder for streak-of-green to gain prominence in the population. For this to happen, it requires not just a male with a streak of green, but a female that finds this attractive; i.e. the market for sex is a two-factor market. In the end, this trait will only gain prominence if it can beat out the existing red-streak equilibrium.
This two-factor market is coupled to a feedback loop that can further entrench these resulting equilibria. This is reflected in the fact that the products of the “exchanges” in this market are more red-streaked birds and red-streak-favoring birds. This would be as if Craigslist exchanges spawned new human buyers and sellers that would flock to Craigslist. In general, males in a species are attracted to females in that species that have certain specific traits, and females seek out males with certain traits. This results in equilibria in a sexually dimorphous population where both sexes have distinctive stable traits that they find attractive in each other.
In addition, this equilibrium is made more stable by the feedback nature of the market – the fact that the children resulting from the pairing of individuals with given traits are more likely to have those traits. Since the population is stuck in this stable equilibrium, it may prove resistant to change, even when that change would be a net gain in average fitness for the individuals in that population. So, for instance, if there exists a strong enough equilibrium around courtship practices in a certain species of bird, then these courtship practices may exist long past the point where there is any resemblance between the practice and any credible signal of evolutionary fitness.
Some possible examples of this might be the enormous antlers of Irish elk and the majestic tails of peacocks. What sort of evolutionary explanation could justify such opulence and apparent squandering of metabolic resources? Costly signaling is a standard explanation, the idea being that the enormous apparent waste of resources is a way of providing a credible signal to mates of their survival fitness. It’s like saying “if I’m able to waste all of these resources and still be doing fine, then you know that I’m more fit than somebody that’s doing just as well without wasting resources.” Think about an expert chess player playing you without one of his knights, and still managing to beat you, versus an expert chess player that beats you without a handicap. If an organism is sufficiently high-fitness, then handicapping itself can be beneficial as a way of signaling its high fitness over other high fitness individuals.
Even in this explanation, the precise details of how the elk or peacock spend their excess resources are irrelevant. Why is the elk’s energy going to producing enormous antlers, as opposed to any other burdensome bodily structure? The right answer to this may be that there is no real answer – it’s just the result of the type of runaway feedback cycle I’ve described above. What’s surprising and interesting to me is the idea that explanations like costly signaling don’t seem to be needed to explain sexual selection of seemingly arbitrary and wasteful traits; if the argument above is correct, then this would be predicted to happen all on its own.