Game Theory Approaches to Bargaining Conflict and Negotiation

Game Theory Approaches to Bargaining, Conflict, and Negotiation

Price Dispersion n Visit any Internet price comparison site and you’ll notice a large range in prices for an identical item n Why the range in prices? Branding n Awareness n Stock on hand n Strategy n

The Strategy of Unpredictability n Firms sell to price conscious shoppers as well as “loyal” consumers n Cutting price to attract shoppers eats into profits from loyals n At the same time, offering a low price has a big payoff from the shoppers (elasticity = 51). n It pays for a firm to be unpredictable in its pricing

… the old story about two friends… n Two suspects, Henry and Dave are taken into custody and separated. n The policeman accuses them of a crime but lacks sufficient evidence to convict them, unless at least one of them confesses. n He explains the consequences following the two actions they could take: namely confessing the crime or not confessing it.

The policeman says: n ”If neither of you confess, then both will be convicted of a minor offence and sentenced to 2 years in jail. n If you both confess, then I will sentence you to jail for 3 years. n 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. ” n http: //www. negotiation. hut. fi/theory/Prisoners. Dilemma. html

In a picture …

Prisoner’s Dilemma in business n Even though both companies expended huge amounts of money to gain a competitive advantage, their relative competitive position ends up unchanged. n Both companies are worse off than if they had each slackened the pace of innovation n This is an example of a prisoner’s dilemma

The Uses of Game Theory n Explanatory n A lens through which to view and learn from past negotiations/conflicts n Predictive n With many caveats n Prescriptive n The main thing is theory helps you to think strategically

Terminology n Strategies n Choices available to each of the players n Might be conditioned on history n Payoffs n Some numerical representation of the objectives of each player n n Could take account fairness/reputation, etc. Does not mean players are narrowly selfish

Tactics n Nibbling n The Hot Potato n The Higher Authority n Good Guy, Bad Guy http: //www. youtube. com/watch? v=SNHU 2 E 9 g. Kos n Feel Felt Found http: //www. youtube. com/watch? v=uf. ISOMm. GGEA n Dumb is smart, smart is dumb http: //www. youtube. com/watch? v=3 o. Kwg 6 W 05 MU n http: //www. youtube. com/watch? v=NPRl. Hww. VIug&feature=related

Negotiation Practice n Scenario n 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. n 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 n Rationality n Players are perfect calculators and implementers of their desired strategy n Common knowledge of rules n All players know the game being played n Equilibrium n Players play strategies that are mutual best responses http: //www. youtube. com/watch? v=k. K-a. Qisd. J 30