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ECOS2201-prelect11

# ECOS2201-prelect11 - D E R E M E N S EAD E M MUTA T...

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S I D E R M E N S · E A D E M · M U T A T O University of Sydney ECOS2201 - Lecture 11 1

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Bargaining We look at strategic aspects of bargaining in a non-cooperative environment, that is, where parties act independently rather than jointly. 2
Basic Theory Bargaining arises when a number of people have to decide how a fixed pool of money is to divided between then Assume there is \$1 to be divided between two parties, who get nothing if they do not agree on a division. 3

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Assume the parties make alternating offers . That is, one party makes an offer of a division which is either accepted or rejected by the second party. If the second party accepts bargaining ends. If the second party rejects, then they make an offer which can be either accepted or rejected by the first party and so on. Assume only two rounds of offers can be made. Question: What offers are made and are they accepted or rejected? Hint: solve backwards 4
Now consider player 1’s offer. If player 1 offers player 2 anything less than . 99 it will be rejected. So player 1 offers x = . 01 , 1 - x = . 99 and it is accepted by player 2. Bargaining ends after one round of bargaining and player 2 gets nearly all of the \$1. There is a last mover advantage . As long as the number of rounds of bargaining is fixed, then this last mover advantage remains. The player that moves last gets a payoff of . 99 5

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However, often there is no natural fixed number of bargaining periods. Bargaining can go on forever. In this case there is no last round and we can not solve backwards. Assume there is an infinite number of bargaining rounds. Assume both players are impatient - an earlier agreement is preferred to a later agreement. This stops (1 , 0) offers and (0 , 1) counter offers being made forever.
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