Bargaining game

Definition

A bargaining game is a strategic interaction where two or more players negotiate the division of a resource or the terms of an agreement, each aiming to maximize their own payoff. The game's outcome often depends on players' beliefs about each other's intentions and strategies, highlighting the importance of information updating and the concept of Perfect Bayesian equilibrium in determining the optimal strategies during negotiation.

5 Must Know Facts For Your Next Test

1. Bargaining games often involve incomplete information, where players must form beliefs about the other player's type or strategy before making decisions.
2. In Perfect Bayesian equilibrium, players not only update their beliefs based on observed actions but also choose strategies that maximize their expected payoffs given these beliefs.
3. The outcome of a bargaining game can be affected by external factors such as time constraints or power dynamics between the players.
4. Different bargaining solutions, such as the Nash Bargaining Solution, provide frameworks for predicting how the resource will be divided among players based on their utility functions.
5. Strategies in bargaining games may include threats, promises, or concessions, all aimed at persuading the other party to agree to favorable terms.

Review Questions

• How do beliefs and information play a role in the strategies employed by players in a bargaining game?
  • In a bargaining game, players' strategies heavily depend on their beliefs about each other's types and potential actions. Players must assess the likely responses of others based on available information and previous actions. This information shapes their expectations and influences their bargaining tactics, leading to different outcomes depending on how well they update their beliefs in light of new evidence.
• Discuss how Perfect Bayesian equilibrium applies to bargaining games and its significance in determining negotiation outcomes.
  • Perfect Bayesian equilibrium is crucial in bargaining games because it provides a framework for players to make optimal decisions based on updated beliefs after observing others' actions. It ensures that each player maximizes their expected payoff while maintaining consistency between beliefs and strategies. This equilibrium concept is particularly significant as it helps predict stable negotiation outcomes when players have incomplete information about each other.
• Evaluate the impact of sequential decision-making in bargaining games on the final agreement reached by the players.
  • Sequential decision-making in bargaining games profoundly affects the final agreement as later players can observe and react to earlier moves. This dynamic allows them to strategically adjust their offers or responses based on perceived strengths or weaknesses of previous actions. The ability to respond also introduces concepts such as commitment and credibility into negotiations, often leading to more favorable outcomes for informed players who leverage timing effectively.

Related terms

Nash equilibrium: A situation in a game where no player can benefit by changing their strategy while the other players keep theirs unchanged.

Sequential game: A type of game where players make decisions one after another, allowing later players to observe earlier actions and adjust their strategies accordingly.

Bayesian updating: The process of adjusting beliefs based on new evidence or information, crucial for players to make informed decisions in strategic situations.