Game Theory_lecture9_08_handouts1

Game Theory_lecture9_08_handouts1 - EF4484-Game...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
EF4484-Game Theory-Lecture 9 November 12, 2008 1 November 12, 2008 EF4484-Game Theory-Lecture 9 1 Bargaining Games Trust Game: Your Data November 12, 2008 2 EF4484-Game Theory-Lecture 9 3 Value Creation and Division Many contracts that people negotiate have to do with the trade of goods, services, and money. Trade creates value. Economists have always emphasized one important insight: people want to trade because, in a society in which goods are scarce, trade can create value. November 12, 2008 EF4484-Game Theory-Lecture 9 4 Value Creation and Division For example, suppose I have a pizza and you have a TV. If we each consume what we individually own, then you will be hungry for food and I will be hungry for entertainment. On the other hand, we could agree to a trade whereby you let me watch TV in exchange for half of my pizza. A trade may make us both better off, in which case we say that trade creates value. November 12, 2008 EF4484-Game Theory-Lecture 9
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
November 12, 2008 2 5 Value Creation and Division Creating value is one thing, dividing value is another. What if I suggest giving you ¼ of the pizza in exchange for watching TV? The trade may still make us both better off than if no trade took place, but now the “terms of trade” are more favorable to me than before. When you and I negotiate, not only we have to look for valuable trades, but we also have to jointly decide how to divide the value. November 12, 2008 EF4484-Game Theory-Lecture 9 6 Value Creation and Division Creating value Dividing value When two parties negotiate, many factors contribute to the terms of the final agreement. their inherent bargaining strengths, the procedure by which they negotiate, the generate contracting environment,… November 12, 2008 EF4484-Game Theory-Lecture 9 7 An Abstract Representation A simply way of representing a bargaining problem is to describe: the alternatives available to the parties the various contracts they can make what happens if the parties fail to reach an agreement November 12, 2008 EF4484-Game Theory-Lecture 9 An Abstract Representation Example: Suppose two players are trying to decide whether to start a business partnership. If they initiate the partnership, then the business will yield a payoff of 4 for player 1 and 6 for player 2. If they do not form a partnership, then they will each get a payoff of 2. V = {(4, 6), (2, 2)} V: bargaining set , the set of payoff vectors defining the players’ alternatives for a given bargaining problem. d = (2, 2) d: default outcome or disagreement point , which describes what happens if the player fail to reach an agreement.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 27

Game Theory_lecture9_08_handouts1 - EF4484-Game...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online