Lecture 16

# Lecture 16 - 5/30/2007 Negotiation (Bargaining) Basic...

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5/30/2007 1 Negotiation (Bargaining) • Basic economic models of bargaining. What intuition can we gain from them 5/30/2007 • What intuition can we gain from them? A Simple Bargaining Example • Suppose Sandy and Mike are negotiating over how to split a bowl of ice cream. • The longer the negotiation takes, the more the ice cream melts. 5/30/2007 • Suppose alternating offers are made – – Sandy makes first offer, Mike accepts or rejects. – If Mike rejects, he makes counter-offer, Sandy accepts or rejects. – If Sandy rejects, he makes another offer, Mike accepts or rejects. – Etc…… until the ice cream all melts. Situation A • It’s very hot out – if Mike doesn’t agree to Sandy’s first offer, the ice cream will completely melt before he gets a chance to make a counteroffer 5/30/2007 make a counteroffer. – This is a single round game. – What happens? – “First mover advantage” for Sandy.

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5/30/2007 2 Situation B - I • It’s a little less hot – If Sandy’s first offer is rejected ice cream melts to 2/3. – If Mike’s counteroffer is rejected, ice cream melts down to 1/3. – If Sandy’s second offer is rejected ice cream is gone 5/30/2007 – If Sandy s second offer is rejected ice cream is gone. • Rounds of the game: – 1) Sandy’s offer, Mike’s acceptance or rejection. – 2) Mike’s counteroffer. Sandy’s acceptance or rejection. – 3) Sandy’s second offer. Mike’s acceptance or rejection. – 4) End of game Situation B - II • What is the outcome? • As usual, since we anticipate players will think ahead, we need to work backwards…. . 5/30/2007 • Hypothetically, If we got to the third round, Sandy would offer (S=1/3-e, M=e). (again, e is a small quantity) • Mike would accept this offer. • Knowing this, what would Mike offer in the second round? Situation B - III • Would Sandy accept? • Knowing this, what will Sandy offer in the 5/30/2007 first round? • Will Mike accept?
5/30/2007 3 Situation B - IV • What is equilibrium of the game? 5/30/2007 • Note that value of Sandy’s first mover advantage has gone down. In General • Suppose we extend the game even longer, e.g. – Ice cream takes longer to melt, or analogously, that counteroffers can be made quicke 5/30/2007 that counteroffers can be made quicker • First mover advantage becomes even less.

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## This note was uploaded on 09/03/2009 for the course ECON 106E taught by Professor Ackerberg during the Spring '08 term at UCLA.

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Lecture 16 - 5/30/2007 Negotiation (Bargaining) Basic...

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