17. Backward induction: ultimatums and bargaining

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Game Theory (ECON 159)

We develop a simple model of bargaining, starting from an ultimatum game (one person makes the other a take it or leave it offer), and building up to alternating offer bargaining (where players can make counter-offers). On the way, we introduce discounting: a dollar tomorrow is worth less than a dollar today. We learn that, if players are equally patient, if offers can be in rapid succession, and if each side knows how much the game is worth to the other side, then the first offer is for an equal split of the pie and this offer is accepted. But this result depends on those assumptions; for example, bargaining power may depend on wealth.

00:00 - Chapter 1. Ultimatum Games: Why Backward Induction Fails Here
14:15 - Chapter 2. Bargaining Games: Setup and Generalization
47:44 - Chapter 3. Bargaining Games: Summary of Proof of Generalization
54:29 - Chapter 4. Bargaining Games: Assumptions and Conclusions

Complete course materials are available at the Open Yale Courses website: http://open.yale.edu/courses

This course was recorded in Fall 2007.