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# Sequential Bargaining

Unlock the complex world of sequential bargaining with this comprehensive guide. You will delve into the fundamentals of sequential bargaining, its key features, and how it forms a fundamental part of managerial economics. Then, explore the game theory of sequential bargaining, its practical applications, and the intricacies of a 3-period bargaining game. Finally, unravel the concept of bargaining power in sequential games, and discover effective techniques and principles with real-life examples. Engaging in this guide promises a wealth of knowledge in Business Studies for both novices and advanced learners alike.

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## Understanding Sequential Bargaining in Managerial Economics

When it comes to decision-making and negotiations within the sphere of Managerial Economics, sequential bargaining is an essential concept.

### 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.

Sequential bargaining, thus, is about order and timing, where each party observes the action of the preceding party before making a decision or taking action.

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.

The precise structure of a sequential bargaining game can be represented mathematically using game theory concepts.

### 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.
 Order of Moves Pre-determined Observation Decision of previous mover observed Bargaining Power Influenced by order of moves

For instance, consider a case where a company is negotiating a contract with a supplier. If the company states its conditions and prices first, it sets the "anchor" or reference point for further negotiations. The supplier can then either accept, reject, or propose a counteroffer. The company's initial offer thus influences the outcome of the negotiation.

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.

The game tree could look like this:

     A
/     \
U       D
|
B
/ \
L   R

The associated payoffs might be set up such that (U,L) = $$(4,3)$$, (U,R) = $$(1,1)$$, and (D) = $$(2,2)$$. In this setup, Player A would choose U because the worst payoff with U (1) is better than the payoff with D (2). Player B would then choose L because the payoff with L (3) is better than that with R (1). Therefore, the equilibrium of this sequential bargaining game is (U,L) with the payoff of $$(4,3)$$.

### 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.

 First Mover Firm Proposal Wages, Working Conditions Second Mover Labour Union Response Accept, Reject, 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.

In essence, sequential bargaining game theory can be used to model any situation where individuals or groups make decisions sequentially based on the actions of others. It provides a formal framework for analysing situations of strategic interdependence, enabling individuals and organisations to navigate complex decision-making scenarios more efficiently.

## 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.

Imagine a company negotiating a sale price for an asset with a potential buyer. In the first round or period, the company proposes a selling price. The buyer can accept or reject this proposal. If the buyer rejects, the game moves into a second period, whereby the buyer can now propose a new price. If rejected, the third period would finally see the company proposing the last price before a deal is reached or the negotiation fails entirely. In this scenario, the dynamics present in each period could significantly influence the final sales price.

### 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.

 First Period Company proposes the contract Second Period Union proposes counter-contract Third Period Company offers the final contract

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.

 First Period Company A proposes acquisition price Second Period Company B proposes counter-offer Third Period Company A presents final offer

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.

In sequential game theory, bargaining power is typically defined by two key aspects: the order of moves and informational advantages.

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.
 Time Preference Patience levels of the player Nature of Payoffs Relative payoff from game's outcome Information Asymmetry Exclusive information possession Outside Options Availability of alternatives Reputation Past behaviour and credibility

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.

Therefore, understanding these factors and their applications can significantly support businesses during negotiations, enabling more strategic decision-making by grasping the dynamics of bargaining power in sequential games.

## 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.

First-mover Advantage: Utilising the first-mover advantage involves being the initial party to make a move or deliver a proposal. This technique sets the reference point for the negotiation and guides the subsequent back-and-forth of proposals and counter-proposals.
 Technique First-mover Advantage Description Being the initial party to make a move or propose an offer
Patience: Sometimes, the second mover, or the player who acts after the first mover, can actually leverage an advantage through patience. By carefully assessing the first mover's action, waiting out their opponent, and then making a calculated move, one might secure more favourable outcomes.
 Technique Patience Description Waiting and making a calculated move after assessing the first mover's action
Information Asymmetry: Having more or better quality information about the opponent's position or potential moves can provide an upper hand. This is particularly useful when crafting initial proposals or responding to counter-proposals.
 Technique Information Asymmetry Description Leveraging additional or superior information about the opponent's position
Anchoring: This technique involves setting a firm initial offer which 'anchors' the negotiation around that point, swaying subsequent negotiations in that player's favor.
 Technique Anchoring Description Setting a firm initial offer to 'anchor' the negotiation

### 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.

Alternation of Roles: The foundation of sequential bargaining is the principle of alternating roles. In a negotiation, the proposer and responder roles switch back and forth, allowing for the natural flow of offer and counter-offer.

Strategic Thinking: In sequential bargaining, each participant's actions depend on their expectations about the future actions of their opponents. This strategic dependence on others' actions forms a cornerstone principle of sequential bargaining.

Inter-temporal Linkages: Decisions made at one point in time often influence decisions at future stages. This inter-temporal linkage plays a significant role in the game and the final outcome.
 Principle Alternation of Roles Explained Roles switch back and forth between proposer and responder in the negotiation Principle Strategic Thinking Explained Participants actions are influenced by expectations of future opponent actions Principle Inter-temporal Linkages Explained Decisions at one point in time affect future actions and outcomes

### 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.

Case study 1 – Industrial Relations: In a labour negotiation scenario, a labour union and a company may engage in multiple rounds of proposal and counter-proposal concerning wages and working conditions. Here, strategies like 'anchoring' by laying out an ambitious initial proposal or 'information asymmetry' where one party possesses detailed knowledge of market wage conditions can manipulate the outcome.
 Case Study Industrial Relations Description Labour union and company engage in sequential bargaining over wages and working conditions
Case Study 2 – Mergers and Acquisitions (M&A): In an M&A scenario, two companies might perform several rounds of negotiations over acquisition price, share ratios, and future business strategy. Here, 'first-mover advantage' where the acquirer proposes the first price or 'patience' where the target company waits for a better offer in future rounds, are key techniques employed.
 Case Study Mergers and Acquisitions Description Companies negotiate over acquisition price, share ratios, and future business strategy

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

## Sequential Bargaining - Key takeaways

• Sequential Bargaining is a type of interactive decision making where players make moves in turns. The order of moves can confer advantages to players. Two common types of advantages are the first-mover advantage, where the party who moves first sets the course of the game, and the second-mover advantage, where the party acting later has the benefit of observing the decisions of the earlier mover.
• Sequential Bargaining Game Theory has practical applications in many business scenarios such as negotiations with suppliers, vendors, employees, etc., and can be strategically employed to influence market entry strategies.
• A 3 Period Sequential Bargaining Game is an expansion of the basic sequential bargaining principles involving three distinct rounds or periods of strategic decision-making. Factors like Time, Patience, Negotiation Power, and Order play important roles in shaping such a game.
• Bargaining power in Sequential Games refers to the relative capacity of each player to influence the game's outcome. Factors like the Order of Moves, Informational Advantages, Time Preferences, Nature of Payoffs, Information Asymmetry, Outside Options, and Reputation can affect a player's bargaining power.
• Sequential Bargaining Techniques can be beneficial in increasing a player's negotiating power and securing favourable outcomes. Techniques such as the first-mover advantage and utilizing patience can be strategically used to navigate the negotiation process effectively.
What is the concept of Sequential Bargaining in Business Studies?
Sequential bargaining in Business Studies is a negotiation process where parties involved negotiate one issue at a time in a specific order or sequence instead of negotiating all issues simultaneously. It is commonly used in complex negotiations.
How does Sequential Bargaining influence decision making in business negotiations?
Sequential bargaining influences decision making in business negotiations by setting an order in which parties present their terms or demands. The initial offer often acts as a reference point, influencing subsequent proposals and decisions. The strategy one adopts can significantly impact the negotiation outcomes.
The advantages of sequential bargaining include better understanding of counterpart’s responses and a structured negotiation process. However, the main disadvantages include that the process can be time consuming, and the individual who has the first move may have a strategic advantage.
What strategies are effectively used in Sequential Bargaining within the business industry?
Effective strategies in Sequential Bargaining within the business industry include preparing thoroughly, knowing one's reservation price, using the anchoring effect to set the initial offer, and incremental concessions to reach an agreeable middle ground. Open communication and patience are also crucial.
Why is understanding Sequential Bargaining critical for successful business negotiations?
Understanding Sequential Bargaining is critical for successful business negotiations as it allows negotiators to leverage the order of decisions and responses. It highlights the strategic significance of commitment, enhancing a party's bargaining power and enabling better prediction of outcomes.

## Test your knowledge with multiple choice flashcards

What is sequential bargaining game theory?

What are the key considerations in the 3 Period Sequential Bargaining Game?

How is Sequential bargaining game theory applied in business scenarios?

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