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Lecture 2:Negotiating Strategy

Professor Keith Chen

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Basic Bargaining Games

• Basic Building Block of our analysis, the take it or leave it offer.

• Let’s run a simple bargaining experiment called the Ultimatum Game.

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Experimental Policy:

• We will run a number of Experiments in Class:– Pedagogical Value

• Rules of the Road:– NO DECEPTION (on my part)!!– Real stakes!!!

• Ask that you play within the rules:– Don’t talk to next class about experiments for a

day,– Do your best and think hard about the games.

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Ultimatum Game:

The rules of the game:1. You will be randomly paired up with someone in the other

section; this pairing will remain completely anonymous.2. One of you will be chosen (by coin flip) to be either the

Proposer or the Responder in this experiment, and some pairs will be randomly chosen to play for money.

3. The Proposer gets to make an offer to split $100 in some proportion with the Responder. So the proposer can offer $x to the responder, proposing to keep $100-x for themselves.

4. The Responder must decide what is the lowest amount offered by the proposer that he / she will accept; i.e. “I will accept any offer which is greater than or equal to $y.”

5. If the responder accepts the offer made by the proposer, they split the sum according to the proposal. If the responder rejects, both parties lose their shares.

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Alternating Offers Model

• Basic Model: Stahl 1972

• Generalized to bargaining sets:– Rubinstein 1982

• Generalized to multiple issues:– Chen 2003

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Next Time

• BATNA, ZOPA & the Nash Solution• Readings:

– BATNA and ZOPA• Raiffa, pages 35-65, or• Bazerman pages 67-88

– Optional Readings on Alternating Offers:• Osborne & Rubinstein, Chapter 7 (technical.)