Sequential Bargaining

Definition and Basics of Sequential Bargaining

Sequential bargaining refers to a method of negotiation where parties involved in a deal act alternately, one after another, rather than simultaneously.

In sequential bargaining, the bargaining power is often not equal and is subject to the intrinsic structure of the bargaining game. Typically, the party moving first in the sequence has an advantage, although that can depend on other factors.

Key Features and Characteristics of Sequential Bargaining

Sequential bargaining is distinguished by several unique features and characteristics.

• Order of Moves: The negotiating parties move in a sequence rather than simultaneously. This order is predetermined and sets the game in motion.
• Observation: Each party observes the decisions made by the previous mover. This information shapes their strategic decision-making.
• Bargaining Power: The power dynamics can be influenced by the order of moves as the first mover often has an advantage.

Accordingly, understanding and strategically utilising sequential bargaining can significantly impact negotiation outcomes in managerial economics. Gain a solid comprehension of this dynamic to enhance your decision-making prowess and negotiation acumen.

Sequential Bargaining Game Theory and Applications

Game theory, particularly sequential bargaining game theory, has substantial applications in various fields, including Business Studies. It provides a scientific approach to strategic interactions where the solution or outcome depends on the actions of all the players involved.

An Overview of Sequential Bargaining Game Theory

The keystone of sequential bargaining game theory lies within extensive form games. In these types of games, the order of moves is explicit, and players have a chance to react to the choices made by others.

To represent a sequential game, we use a decision tree, also known as a game tree, where each node (a point in the tree) represents a player's decision and each branch (connecting line) represents a player's possible actions. At the end of every possible path lies an outcome, represented as the terminal node, associated with a numeric payoff for each player.

Let's consider two players A and B. Player A moves first and has two possible actions: Up (U) and Down (D). Should player A select U, player B would then make their decision with two options: Left (L) and Right (R). Each combination leads to a different result with distinct payoffs for players A and B.

     A
  /     \
 U       D
 |
 B
 / \
L   R

Practical Applications of Sequential Bargaining Game Theory in Business Studies

Sequential bargaining game theory finds practical applications in a wide array of business scenarios. For instance, businesses often engage in sequential bargaining with suppliers, vendors, employees, and other stakeholders. Their negotiation tactics can be strategically set based on the principles of sequential bargaining game theory.

Consider a firm negotiating with a labour union. The firm, given the power dynamics, may often hold the position of the first mover. It may make the first proposal concerning wages and working conditions. The labour union, observing this, can then decide to either accept the proposal, reject it, or make a counter-proposal.

Another critical application of sequential bargaining game theory in business studies is in market entry strategies. A company planning to enter a new market may have to consider the potential reactions of incumbent firms. Through game theory analysis, the firm can anticipate potential responses and plan their market entry strategy accordingly.

Exploring the 3 Period Sequential Bargaining Game

As you delve deeper into the study of sequential bargaining in managerial economics, you will encounter more complex scenarios, such as the 3 Period Sequential Bargaining Game. This particular game situation affords the opportunity to explore the dynamics of sequential bargaining in situations where multiple rounds of negotiations are required.

Understanding the Dynamics of 3 Period Sequential Bargaining Game

At its core, the 3 Period Sequential Bargaining Game is an expansion on the basic principles of sequential bargaining and game theory. The central premise of this bargaining game involves three distinct rounds, or periods, of strategic decision-making.

Each period or round in the game represents an opportunity for one party to propose a division of a resource and for the other party to respond. The key difference between this and a simpler sequential bargaining game is that if an agreement is not reached in the first period, the game continues into a second period, and potentially a third, until an agreement is achieved.

This game places more importance on the aspect of time and the potential for changing power dynamics over multiple rounds. For instance, if a player rejects a proposal in an early round, they may gain bargaining power in the following round as the initial proposer may be under increased pressure to reach an agreement.

To fully grasp the dynamics of a 3 Period Sequential Bargaining Game, you must keep several considerations in mind:

• Time: As the game extends over multiple periods, both parties must consider future rounds when making decisions in the present round.
• Patience: The willingness of a player to wait for a potentially better offer in a future round can be a significant factor.
• Negotiation Power: The power to propose a division can rotate from round to round, or potentially stay with one player depending on the rules of the game.
• Order: The sequence of moves within a round, and the sequence of rounds itself, can impact the strategy and influence the game's outcome.

Relevant Examples of 3 Period Sequential Bargaining Game in Business

The 3 Period Sequential Bargaining Game can model various real-world business scenarios where negotiations involve several stages or rounds. Here are two relevant examples within the business context.

Labor Negotiations: This game is particularly applicable in labor negotiations, where both the employer and the labor union have strong interests in the negotiations' outcome. Suppose a company is renegotiating a contract with its employee union and has three rounds of negotiations. Each round represents a period where the company, or the union, can propose new conditions. If the proposals are not accepted in a given round, they proceed to the next until an agreement is reached, or the negotiation dissolves.

Mergers and Acquisitions: In a merger or acquisition, companies negotiate several terms, including the merger ratio or acquisition price. Such negotiations can extend over multiple rounds before an agreement is reached, thus applying the 3 Period Sequential Bargaining Game concept. For instance, company A initiates an offer to acquire company B. If company B rejects the initial offer, it could propose a counter-offer in the next period. Finally, Company A has the option to propose a final offer in the third period.

These examples illustrate the applicability of the 3 Period Sequential Bargaining Game in business settings, and how understanding its dynamics can assist in formulating strategic negotiation tactics.

Bargaining Power in Sequential Games

In any negotiation or bargaining game, particularly in sequential games, the concept of bargaining power is widely prevalent and significantly influential. The idea of bargaining power pertains to the relative capacity of each player within the game to influence the outcome in their favour. Furthermore, an understanding of bargaining power can be critical in defining strategies and making informed decisions during the game.

Concept of Bargaining Power in Sequential Game

In a sequential game, the concept of bargaining power has a specific application. It often relates to the temporal order of moves or the ability of a player to anticipate and strategically respond to the actions of others.

The order of moves refers to the sequence in which players make their decisions within the game. In sequential games, where players make decisions one after another, the player who gets to act first often has an advantage. They can set the course of the game by their initial action, which is followed by ensuing reactions from the other players. This advantage is often referred to as the first-mover advantage.

Moreover, the player acting later in the game can have the advantage of observing the decisions made by earlier movers, allowing them to make more informed decisions. This is known as the second-mover advantage.

Informational advantages pertain to how much each player knows about the game and the other players. A player equipped with more information about the preferences, payoffs or strategies of other players generally possesses greater bargaining power.

To illustrate, consider a two-player game where player A moves first, proposing a split of a pie. Player B, observing the proposal of player A, can agree to the split or reject it. In this case, player A's ability to set the terms first confers them with some bargaining power. However, player B's ability to accept or reject the proposed split also provides them with some power.

Factors Influencing Bargaining Power in Sequential Games

Several factors can influence the bargaining power of players in a sequential game, and these factors can play a crucial role in determining the outcomes of the game.

• Time Preference: In a sequential game, if a player is more patient, they might be willing to hold on for more extended periods and achieve a better outcome, hence increasing their bargaining power.
• Nature of Payoffs: A player could have a significant bargaining power if their payoff from the game's outcome is higher relative to the other players.
• Information Asymmetry: Having unique information about strategic variables, the game structure, or other's payoffs not known to the other players can deliver robust bargaining power.
• Outside Options: Players with better alternatives to the game agreement can increase their bargaining power significantly.
• Reputation: Players with a strong reputation tend to have a greater bargaining power as they might be perceived as more likely to stick by their threats or promises.

These factors intensively interplay in real-world scenarios, where businesses conduct negotiations that can be formalised as sequential bargaining games. For example, in labour negotiations, time preference plays a vital role where a more patient labour union can take a firm stance on their demands, thereby increasing their bargaining power. On the other hand, high information asymmetry, such as exclusive know-how of a unique production technique by the employer, can extend greater bargaining power to the employer.

Effective Sequential Bargaining Techniques and Principles

Thriving in the world of business often necessitates negotiation and bargaining. Within such scenarios, understanding the principles and techniques of sequential bargaining can play a pivotal role. Successful utilisation of these techniques can increase the chances of securing favourable outcomes in negotiations.

Commonly Used Sequential Bargaining Techniques

In sequential bargaining, effective negotiation techniques are linked to the systematic nature of the process. Several commonly used techniques can enhance bargaining power and improve decision-making.

Understanding the Principles of Sequential Bargaining

Core principles lie at the heart of sequential bargaining. These principles can guide the implementation of techniques and influence the design of negotiation strategies.

Real Life Sequential Bargaining Examples and Case Studies

In the business world, one often witnesses the application of sequential bargaining principles and techniques. From corporate mergers to labour negotiations, they can be observed in a myriad of contexts.

These case studies display the extent to which sequential bargaining principles and techniques inform real-world business negotiations.