Game Theory Approaches to
Bargaining, Conflict, and
Negotiation
Course Overview
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
CPU Competition
 Intel and AMD compete fiercely to develop
innovations in CPUs for PCs
 As a result of this, CPU speeds have
increased dramatically, but there are few
differences between the products of the two
companies
Prisoner’s Dilemma
 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
Sale Price Guarantees
 Circuit City and many other stores offer sale
price guarantees
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If an item comes on sale in the time period
after you bought it, they will match the
difference in prices
Thus, consumers wishing to buy now are
“protected” against regrets from future price
reductions
Walking Down the Demand Curve
 Circuit City would like to sell goods at high
prices to those with high willingness to pay for
them and then lower prices to capture those
with lower willingness to pay.
 They might do this by running sales after new
items have been out for a while
 But high value consumers will anticipate this
and wait for the sale to occur.
The Power of Commitment
 By offering to rebate back the difference in
prices, Circuit City makes the sale strategy
less profitable for its “future” self.
 This commits it to less discounting in the
future
 And enables it to charge higher prices
today…and tomorrow.
Seasoned Equity Offerings
 When owner-managed companies make
seasoned equity offerings, the price of its
stock declines by more than the dilution from
the new offering
 Why should this be? Companies seek access
to equity finance because they have some
promising new project
 Isn’t this good news about the company?
Signaling
 The seasoned offering is a signal about the
status of the companies current projects as
well as future ones.
 If the current projects are not profitable, the
cost (in dilution) to the owner-manager of
issuing new share is lower.
 Therefore, the seasoned offering indicates
bad news about the present condition of the
firm as well as a low threshold for the
profitability of the new project
Strategies for Studying Games of
Strategy
 Two general approaches
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Case-based
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Pro: Relevance, connection of theory to
application
Con: Generality
Theory
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Pro: General principle is clear
Con: Applying it may not be
Approach of this course
 Intermediate between theory and cases
 Lectures organized around a single general
principle.
 Illustrated with cases and experiments
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Cases are “stripped down” to essentials
 Constant reality checks
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When does theory work?
When doesn’t it?
Why doesn’t it?
Some Background Common to All
Games
 Games versus Decisions
 Nature is not a strategic player
 Individual decisions might still be games if
there are control problems with future “self”
 Large versus Small Numbers
 Games typically thought to pertain to small
numbers of players
 But large markets can become small
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Bilateral contracting/holdup problems
Information/signaling – market for venture capital
Classifying Games
 Sequential v simultaneous
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Stackelberg/Cournot
 Distributive v integrative
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Matching pennies/coordination
 One-shot v repeated
 Public v private information
 Fixed v manipulable rules
 Enforceable v unenforceable cooperative
agreements
Terminology
 Strategies
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Choices available to each of the players
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Might be conditioned on history
 Payoffs
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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
Standard Assumptions
 Rationality
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Players are perfect calculators and
implementers of their desired strategy
 Common knowledge of rules
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All players know the game being played
 Equilibrium
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Players play strategies that are mutual best
responses
The Uses of Game Theory
 Explanatory
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A lens through which to view and learn from
past negotiations/conflicts
 Predictive
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With many caveats
 Prescriptive
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The main thing you’ll take out of the course is
an ability to think strategically