Lect03_Slides

Lect03_Slides - Bargaining BargainingGames...

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argaining Games Bargaining Games An Application of Sequential Move Games
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he Bargaining Problem The Bargaining Problem The “Bargaining Problem” arises in economic situations where there are gains from trade, for example, when a buyer values an item more than a seller. e problem is ow divide the gains, for example, The problem is how to divide the gains, for example, what price should be charged? Bargaining problems arise when the size of the market all and there are no obvious price andards is small and there are no obvious price standards because the good is unique, e.g. a house at a particular location. A custom contract to erect a building, etc. We can describe bargaining games (in extensive form) that allow us to better understand the bargaining problem in various economic settings.
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argaining Games Bargaining Games A bargaining game is one in which two (or more) layers argain over how to divide the gains om players bargain over how to divide the gains from trade. The gains from trade are represented by a sum of money, M, that is “on the table.” Players move sequentially, making alternating offers. l Examples: A Seller and a Buyer bargain over the price of a house. bor Union and Firm bargain over wages & enefits. A Labor Union and Firm bargain over wages & benefits. Two countries, e.g. the U.S. and Japan bargain over the terms of a trade agreement.
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e isagreement Value The Disagreement Value If both players in a 2 player bargaining game disagree as to ow divide the sum of money M (and walk away om how to divide the sum of money M, (and walk away from the game) then each receives their disagreement value. Let a=the disagreement value to the first player and let b=the disagreement value to the second player. In many cases, a=b=0, e.g., if a movie star and film t t th i t d’ t t company cannot come to terms, the movie star doesn’t get the work and the film company doesn’t get the movie star. e disagreement value is know by some other terms, .g., The disagreement value is know by some other terms, e.g., the best alternative to negotiated agreement “BATNA.” By gains from trade we mean that M>a+b.
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ke it or Leave it Bargaining Games Take it or Leave it Bargaining Games “Take it or leave it” is the simplest sequential move bargaining game between two players; each player makes gg g py ; py one move. Player 1 moves first and proposes a division of M. For example x for player 1 and M x for player 2 For example, x for player 1 and M x for player 2. Player 2 moves second and must decide whether to accept or reject Player 1’s proposal. If Player 2 accepts the proposal is implemented If Player 2 accepts, the proposal is implemented.
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This note was uploaded on 12/26/2011 for the course ECON 171 taught by Professor Charness,g during the Fall '08 term at UCSB.

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Lect03_Slides - Bargaining BargainingGames...

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