Ex5.

3 : Discounted Bargaining Game II

Timing as a Strategy
Quiet often in the real businesses, timing (to offer) is as critical as the amount to offer.
Signle period, two-stage game
In a single period, two-stage game, assuming
a common discount rate d apply to players 1 and 2
in stage-1, after an time delay of t
1
, 1 offer an amount 1 x
1
to 2. S
1
t
1
, x
1
,
in stage-2, after an time delay of t
2
, 2 decide whether to accept the offer. S
2
|t
2
, |accept, deny
i
|}
If in stage-2 P
2
had to respond immediately (t
2
0)
in stage-1 P
1
would simply offer 0 and take 1 at t
1
0
But P
2
do have certain bargaining power by manipulating t
2
.
If P
2
can make a commitment of certain t
2
t 0 in stage-1 (by the time P
1
makes her decision,)
According to the logic of the original bargaining game,
in stage 1 P
1
should offer 1 d
t
without any delay, s
1
0, d
t

Then in stage-2, P
2
should filfill her commitment by s
2
|t
2,
accept|.
And the net payoffs, in the present value of stage-1 are

2
d
t
(1 d
t
),
1
d
2 t
Yet this result depends on the trust-worthiness of P
2
's commitment on t
2
.
As homo economicus, P
2
should set t
2
to maximize his own profit.
For maximun
2
, let
t

2
0, and solved for t
(We can prove that
2
is a convex function of t, d [0, 1])
t

Log
e
2
Log
e
d
Log
d
1
2
Considering P
2
as an homo economicus, P
1
should predict that P
2
will set t
2
t

and set her (P

1
's) own strategy accordingly.
Therefore there will be an sub-game perfacted Nash equilibrium at (by replacing t by t

in s
1
and s
2
)
SPNE s
1
0,
1
2
, s
2
Log
d
1
2
, accept
The resultant payoffs in the net present value of stage-1 are

1l 4
Findings
The interesting thing are
the payoffs of both player are equal, and are independent of the discount rate
the attrition ration is always 1/2, which is also independent of discount rate
what does change by discount rate (d) is P
2
' s decision delay (t
2
). Given d, P
2
always set t
2
to melt away exactly one half of the initial
value.
which implies that
If timing (to offer and to accept) is an strategic option and both players were rational and honest, exactly one half of the ice-
cream would melt away during bargaining, no matter how hot it is. (the speed of melting doesn't make a difference.).
L5( 2) . nb 3