Bargaining Game

Game Description

Learning Objective 1: Tradeoffs and Fairness in Negotiations

Features of a two-party negotiation may offer an advantage to a particular party (e.g. information asymmetry). However, fairness considerations, which are an important component of two-party negotiations, may lessen any advantage.

Learning Objective 2: Solving with Backward Induction

This game may be used as an example of backward induction. In particular, once we establish a player’s expected payoff (provided the game proceeds to the next round), we know the minimum acceptable proposal this round.

Learning Objective 3: Equilibrium in the Indefinitely Repeated Game

In more advanced classes, this game may be used to illustrate subgame-perfect Nash equilibria in indefinitely repeated games. In this case, first-mover advantage is increasing as players become more impatient (because the pie shrinks more rapidly between rounds).