From Richard Gosselin on 06/1/2018
This game is a multi-round version of the Ultimatum game. Pairs of students decide on how to split a pot of money by alternating who makes the accept-or-reject proposal. If rejected, the amount of money shrinks, each student receives zero, and the pair proceeds to the next round. If a proposal is agreed to, the students receive the agreed upon split.
Features of a two-party negotiation may offer an advantage to a particular party (e.g. information asymmetry). However, fairness considerations, which are an important component of two-party negotiations, may lessen any advantage.
This game may be used as an example of backward induction. In particular, once we establish a player’s expected payoff (provided the game proceeds to the next round), we know the minimum acceptable proposal this round.
In more advanced classes, this game may be used to illustrate subgame-perfect Nash equilibria in indefinitely repeated games. In this case, first-mover advantage is increasing as players become more impatient (because the pie shrinks more rapidly between rounds).