Chp 15 Game Theory & Chp 16 Bargaining

Fred and his employer both know that he can generate $200,000 of profit per year for his company. After negotiations, they agree that he will earn $110,000 in annual compensation. What does this imply for the value of his outside or next best alternative? $0 $5,000 $10,000 $20,000

$20,000

Dominant strategy

A best response for a player to choose no matter what the other player chooses If each player has a dominant strategy, that makes up a dominant strategy equilibrium.

Mutual interdependence

A market situation in which the actions of one firm have an impact on the price and output of its competitors.

The prisoner's dilemma is an example of A sequential game A shirking game A non-cooperative game A dating game

A non-cooperative game

First-mover advantage is a characteristic of A dominant strategy A simultaneous-move game A sequential-move game A Nash equilibrium

A sequential-move game

Consider a vendor-buyer relationship. Which of the following conditions would lead to the buyer having more bargaining power? Lots of substitutes for the vendor's product are available. There are relatively few buyers and many vendors. It costs little for buyers to switch vendors. All of the above

All of the above

In the strategic view of bargaining, solving the game to find preferred negotiating strategies: Requires that both players know the exact form of the game Requires that neither player can change the game half way through May not yield a unique strategy that will always allow you to best your opponent All of these choices

All of these choices

In the axiomatic or non-strategic view of bargaining, you can improve your bargaining position: By reducing your disagreement value By increasing your gains from reaching an agreement By decreasing your counter-party's gains from reaching an agreement By reducing your opponent s disagreement value

By reducing your opponent s disagreement value

In a simultaneous move game, if both charge the low price (LP) they each earn $5. If both charge the high price (HP) they each earn $10. If they charge different prices, the one playing LP earns $15 and the other earns $1. What s the dominant strategy for each firm? Charge a high price Charge a low price Firm A charge a low price and firm B charge a high price Firm A charge a high price and firm B charge a low price

Charge a low price

In the Labor Negotiation Game, bargaining hard confers an advantage when your opponent accommodates you. But if bargaining hard destroys all the gains from trade if your opponent bargains hard too. In the sequential move version, the second mover can improve his earnings if she can: Commit to accepting a good offer Commit to rejecting a bad offer Threaten to reject a food offer Threaten to reject a bad offer

Commit to rejecting a bad offer This forces the first mover to offer an offer worth accepting

Nash Equilibrium

Each decision maker is choosing the best response to what the other decision maker has chosen. All economic decision makers opt to keep the status quo. This means that there is no incentive for either decision maker to change what he or she is doing.

What is an Oligoply

Few Firms (2-3) Med-High Barriers to entry; the firm has more control over price Mutual Interdependence Long-run economic profit possible Output can be homogeneous or differentiated

What is the Non Strategic View of Bargaining

Focuses on the games & alternatives of agreement to determine the outcome bargain Join forces if A > D1 + D2 Find extra (A - (D1+D2))/2

n a simultaneous move game, if both charge the low price (LP) they each earn $5K. If both charge the high price (HP) they each earn $10K. If they charge different prices, the one playing LP earns $15K and the other earns $1K. The Nash Equilibrium will be For each firm charge HP For each firm charge LP For one firm to charge LP and the other HP None of these choices

For each firm charge LP

In the Labor Negotiation Game, bargaining hard confers an advantage when your opponent accommodates you. But if bargaining hard destroys all the gains from trade if your opponent bargains hard too. The Nash Equilibrium solution is: For both players to bargain hard For one player to bargain hard and the other to accommodate For both players to accommodate the other None of these choices

For one player to bargain hard and the other to accommodate

George and KC have been working jobs that pay $60,000 and $30,000 per year, respectively. They are trying to decide whether to quit their jobs and jointly open up a taco stand on the beach, which they estimate can earn $150,000 per year. How will the taco stand proceeds be split? They won't quit their jobs. George gets $90,000 and KC gets $60,000 George gets $75,000 and KC gets $75,000 George gets $100,000 and KC gets $50,000

George gets $90,000 and KC gets $60,000

In the axiomatic or non-strategic view of bargaining, your counter-party getting a bonus for completing the transaction will: Increase your counter-party's bargaining position Increase your bargaining position Make your counter-party less willing to transact Make you more willing to transact

Increase your bargaining position

In a negotiation, a good threat (one that could earn you more money): Is one you make good on all the time Is one that your counter-party is surprised by Is one you rarely have to use Is one you invoke when you get a good offer

Is one you rarely have to use

In the Labor Negotiation Game, bargaining hard confers an advantage when your opponent accommodates you. But if bargaining hard destroys all the gains from trade if your opponent bargains hard too. In the sequential move version, the player to earn the most: Is the first mover Is the second mover Both negotiators earn the same amount It depends on the amount bargaining over

Is the first mover

How can a pure strategy Nash equilibrium be accurately described? It is always the overall best outcome. It's an outcome in which neither player wants to change strategies. It can only be reached by collusion. One exists in all games.

It's an outcome in which neither player wants to change strategies.

Pete and Lisa are entering into a bargaining situation in which Pete stands to gain up to $5,000 and Lisa stands to gain up to $1,000, provided they reach agreement. Who is likely to be the stronger bargainer? Pete Lisa They will be equally effective. These potential gains will have no impact on bargaining.

Lisa Lisa has less to gain from agreement and therefore will be a stronger bargainer.

What is the Strategic View of Bargaining

Model as a simultaneous-move or sequential-move game

In a Nash equilibrium, players are always maximizing their joint profit. one player is always earning a higher profit than the other. players must be playing the game sequentially. None of the above

None of the above

In the axiomatic or non-strategic view of bargaining: The specific rules of the underlying game are clearly laid out The solution depends critically on whether players can or cannot commit to an otherwise unreasonable position Will lead to one party extracting all or most of the gains from trade None of these choices

None of these choices

Sequential Game

Played just once: Player 1 moves first, Player 2 moves second Observes all prior decisions of rival before having to move

Simultaneous Move Game

Players do not observe the rival's decision before making their own move

Risk Averse

Prefer a certain payoff to gamble with a higher expected value

Risk-Loving

Prefer gambling with lower expected values over certain payoff

What is the Concentration Ratio

Sales of the largest four firms as a percentage of total industry sales A measure of oligopoly power in an industry Higher concentration = greater power Rough measure of market power

If your two suppliers of a product were to merge: You do better in negotiations because now you only have to deal with one negotiation You do worse in negotiations because now the gains from reaching an agreement have fallen You do better in negotiations because now the gains from reaching an agreement have risen You do worse in negotiations because now you have a lower disagreement value

You do worse in negotiations because now you have a lower disagreement value

The game of chicken has a second-mover advantage. a first-mover advantage. no sequential-move advantage. potential sequential-move advantages, depending on the players.

a first-mover advantage. the player who can commit to a course of action captures a majority of the gains from trade.

Spending on advertising to steal your competitors' customers is an example of a coordination game a prisoner's dilemma a signaling game a sequential game

a prisoner's dilemma

In an entry game, the incumbent would like to keep the potential entrant from actually entering. Threatening to compete hard upon entry is an empty threat because the entry would be sunk by the time the form of competition occurs not credible would lower the incumbent's profits if he had to engage the strategy all of the choices

all of the choices

Game theory assumes that to compute a the likely outcome of games, one needs to assume that players act Optimally Rationally in their own self-interest all of these choices

all of these choices

Risk Neutral

choose highest expected value regardless of risk

For threats or commitments to be effective, they must be irrational. profitable. credible. None of the above

credible. The goal of a commitment or threat is to have your rival believe you.

In a simultaneous move game, if both charge the low price (LP) they each earn $5K. If both charge the high price (HP) they each earn $10K. If they charge different prices, the one playing LP earns $15K and the other earns $1K. If the businesses play indefinitely, then a Nash Equilibrium is for your firm charge a LP when the other firm does for one firm to charge a HP forever for each firm to charge HP until the rival does not, and then to charge LP for each firm to charge LP until the rival does not, and then to charge a HP forever

for each firm to charge HP until the rival does not, and then to charge LP

In a Dating Game, Sally prefers Wrestling and Joe prefers Ballet. Each receive 2 if attend their preferred events and 0 if they attend their less preferred events. But if they got to an event together, they receive and additional payoff of 1. The Nash Equilibrium is for both to go to the Wrestling for both to go to the Ballet for each to go to their preferred event for each to go to their less preferred event

for each to go to their preferred event

A common solution to a coordination game is for one player to go first for one player to accommodate the other to issue threats before the game starts to change the payoffs

for one player to go first

In repeated games, all of the following make it easier to get out of bad situations except be nice, no first strikes. respond immediately to rivals. punish uncooperative players as much as you can. make sure your competitors can easily interpret your actions.

punish uncooperative players as much as you can. this is bad advice. Instead, you should be forgiving and punish just enough to deter uncooperative behavior.

Prisoner's Dilemma

self interest leads to outcomes that reduce both player's payoffs - cooperation can improve both players payoffs