Game theory is used to analyze interdependence between variables in a game. There are two branches of game theories. Cooperative and non-cooperative game theory. “A “game,” has three elements: players, options/moves available and the payoffs resulting from each combination of moves” (Satell, 2009). Assumptions are that the players in this game act rationally, optimally and selfishly for the outcome to be computed.
With regards to my negotiation with my employer, my employer coming first means that he has more advantage over me. “Equilibria of sequential games, where players take turns moving, are influenced by who moves first (a potential ﬁrst-mover advantage, or disadvantage), and who can commit to a future course of action” (Satell, 2009). The most likely outcome would be assuming that the value of winning is 10; the value of employee compromising is -5, and payoff being the sum of the two. Then there will be four outcomes. If both choose low income, the employer wins 10 but losses 5 making the payoff be 5 and the employee doesn’t lose anything and neither gains anything leaving me at zero. In the same way if both employer and employee choose high income, the employer gets a payoff of 10 and the employee -5. If employer chooses low income and employee chooses in, then the employer wins -5 and the employee gets 5. Finally if the employer chooses high income, and employee chooses out, then the employer gets zero and the employee gets 10.
“The strategic view of bargaining focuses on how the outcome of bargaining games depends on who moves ﬁrst and who can commit to a bargaining position, as well as whether the other player can make a counteroffer” (McCann, & Froeb, 2013).
To realize a higher payoff, I would cooperate with my employer since from the tree, whether it’s from low salary offer or from high salary offer, provided I accept the offer given by my employer, I get a payoff of 75 which is much better than zero. If we assume that the employer is the incumbent then by modeling the situation using game theory, we find that accommodating an entrant leads to profits while fighting an entrant leads to losses (McCann, & Froeb, 2013).
Game theory can also be used to bargain in business. With regards to negotiating for an item, say buyer A is willing to part with $10 for an item at a shop. The seller says the item costs $15. A negotiation comes up since both are in need of what the other has i.e. the product being sold and the money the buyer is willing to part with. So they can come to a settlement of $12. Game theory is applicable in this manner.
- McCann, B. T. & Froeb, L. M. (2013). Managerial Economics (Upper Level Economics Titles). CA, USA: South-Western College.
- Satell, G., (2009). A guide to Game Theory and Negotiations. Rerieved from http://www.digitaltonto.com/2009/game-theory- guide-to- neg