Lecture 17 - Backward Induction: Ultimatums and Bargaining

We develop a simple model of bargaining, starting from an ultimatum
game (one person makes the other a take it or leave it offer), and
building up to alternating offer bargaining (where players can make
counter-offers). On the way, we introduce discounting: a dollar
tomorrow is worth less than a dollar today. We learn that, if
players are equally patient, if offers can be in rapid succession,
and if each side knows how much the game is worth to the other
side, then the first offer is for an equal split of the pie and
this offer is accepted. But this result depends on those
assumptions; for example, bargaining power may depend on wealth.