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Bargaining game (Essay Sample)


I argued in this paper whether competition affects social preferences in the context of a bargaining game.


Does competition affect social preferences in the context of a bargaining game?
Competition is a state where sellers try to outdo each other in their pursuit of profit, higher sales volume and increased market share. This is often done by varying certain parameters like price, promotions, products, and distribution. This term has been redefined by many economists like Adam Smith, Merriam Webster, and Cournot. Consumer preferences are very important for any business. Businesses must perennially strive to meet these preferences. Bargaining is the art of negotiating a price between a buyer and a seller and later coming to an agreement (Anderson, 2008).
Main Body
The presumption that social preferences can be ignored in a competitive market does not hold water. Social preferences only become irrelevant if there is a separation of preferences and a completeness of contracts that scarcely happens (Becker, 2013). Many of the market experiments have indicated that the standard neoclassical model accurately predicts market outcomes. This has further been confirmed theoretically by Smith (2009), Schmidt (2011), and Dufwenberg (2008). They all agree that competition forces all market participants to behave in a manner suggesting self-interest. Social preferences are in line with numerous anomalies frequently seen in markets. The two conditions mentioned above, do not hold if the market results are in correspondence with the predictions of the standard neoclassical model (Bolton, 2011). The standard neoclassical model is formulated on the assumption that every economic agent is only interested in its material well being. However, field and experimental data has proven that not all people are totally self-interested (Camerer, 2009). Many people care about the welfare of their peers, colleagues, and relatives. This willingness to sacrifice their own resources in order to promote justice and fairness for the good people and punish the wrongdoers is termed social preference.
In competitive markets, the neoclassical model gives a very accurate analysis of actual market results. The competitive equilibrium outcome wins through even if there is a small number of buyers and sellers. Whenever there is an imperfect market transparency, there exists no Walrasian auctioneer, and if there is, market participants exhibit strong social preferences. Dufwenberg (2008) uses a general equilibrium model and gives the leeway to a large class of social preferences. He also identifies a mandatory and sufficient condition on preferences known as "separability." Separability implies that people with social preferences behave in a classical (purely self-centred) manner. It is also important to note that separability does not in any way imply the two fundamental theorems of welfare.
Competition has a direct effect on social preferences in a bargaining game. It is extremely important to know what ultimatum game (UG) entails. The Ultimatum game is a two-player bargain game where a responder and a proposer bargain over some money. Carrying out an experiment, involves comparing the values of the ultimatum game and those of multiple players where competition exists. Here, the addition of several competing responders and proposers to the bilateral ultimatum game is done (Fehr, 2013). This helps in the examination of the impact of competition on bargaining in the experiments. The current model predicts that the proposer to the game should reap the entire surplus in the bilateral bargaining game. Schotter (2009) describes the ultimatum game as an extreme mode of bargaining game where an offer is tabled by one person and either rejected or accepted by the other person. Schwarze (2007) explains that the proposer declares a split of money between himself and a responder. The responder has two options, to accept or reject the offer. If the respondent accepts the offer, he earns some money, and the proposer earns the rest of the money. However, if the responder turns down the offer, they both get nothing (Kuzick, 2008). The UG, also analyses whether responders are able to punish errant proposers.
Summarily, it is very difficult to bring out the relationship between social preferences and competition without considering experimental data (Fehr, 2013). From experimentation, it is apparent that the neglect of fairness issues and decision concerns can prevent a satisfactory comprehension of how competition affects bargaining. It is also apparent that introducing a small amount of competition that is, adding one competitor to a bilateral UG, induces massive behavioural changes among respondents and proposers (Falk, 2010). This in turn causes a large change in accept...
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