Game Theory Approaches to
Bargaining, Conflict, and
Negotiation
Price Dispersion
 Visit any Internet price comparison site and
you’ll notice a large range in prices for an
identical item
 Why the range in prices?
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Branding
Awareness
Stock on hand
Strategy
The Strategy of Unpredictability
 Firms sell to price conscious shoppers as
well as “loyal” consumers
 Cutting price to attract shoppers eats into
profits from loyals
 At the same time, offering a low price has a
big payoff from the shoppers (elasticity = 51).
 It pays for a firm to be unpredictable in its
pricing
… the old story about two friends…
 Two suspects, Henry and Dave are taken
into custody and separated.
 The policeman accuses them of a crime but
lacks sufficient evidence to convict them,
unless at least one of them confesses.
 He explains the consequences following the
two actions they could take: namely
confessing the crime or not confessing it.
The policeman says:
 ”If neither of you confess, then both will be
convicted of a minor offence and sentenced
to 2 years in jail.
 If you both confess, then I will sentence you
to jail for 3 years.
 If one of you confesses then he will be treated
leniently and will be on remand for 1 year;
and used as a witness against the other, who
will be sentenced to 5 years in jail; 4 for the
crime and 1 for obstructing the justice.”

http://www.negotiation.hut.fi/theory/PrisonersDilemma.html
In a picture …
Prisoner’s Dilemma in business
 Even though both companies expended huge
amounts of money to gain a competitive
advantage, their relative competitive position
ends up unchanged.
 Both companies are worse off than if they had
each slackened the pace of innovation
 This is an example of a prisoner’s dilemma
The Uses of Game Theory
 Explanatory

A lens through which to view and learn from
past negotiations/conflicts
 Predictive

With many caveats
 Prescriptive

The main thing is the theory helps you to think
strategically
Terminology
 Strategies

Choices available to each of the players

Might be conditioned on history
 Payoffs

Some numerical representation of the
objectives of each player

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Could take account fairness/reputation, etc.
Does not mean players are narrowly selfish
Tactics
 Nibbling
 The Hot Potato
 The Higher Authority
 Good Guy, Bad Guy
http://www.youtube.com/watch?v=SNHU2E9gKos
 Feel Felt Found
http://www.youtube.com/watch?v=ufISOMmGGEA
 Dumb is smart, smart is dumb
http://www.youtube.com/watch?v=3oKwg6W05MU
 http://www.youtube.com/watch?v=NPRlHwwVIug&feature=related
Negotiation Practice
 Scenario
 A: You have a business plan. You want B to
invest in the plan. You need €50 000. Decide
what you can/are willing to give in return.
 B: You are a business angel. Decide on the
conditions you would expect when investing
in a project (right to decide, ROI, legal
implications etc)
Standard Assumptions
 Rationality

Players are perfect calculators and
implementers of their desired strategy
 Common knowledge of rules

All players know the game being played
 Equilibrium
Players play strategies that are mutual best
responses
http://www.youtube.com/watch?v=kK-aQisdJ30
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