Lecture 06 Class Notes


  • Imagine a room full of 100 he’s and 1 she. Prisoner’s dilemma: analyze from her perspective, if she cooperates.
  • If 50 he’s cooperate and 50 defect, she gets half the payoff on her 10, and half on her 0. 0.5(10) +0.5(0)=5.
  • If ¾ of the he’s cooperate and ¼ defect, she gets 3/4 payoff on her 10 and 1/4 on her 0: .75(10) + .25(0)=7.5.
  • If 99 he’s cooperate, and 1 defects: .99(10) + .01(0) = 9.9
  • As a higher percentage of the he’s cooperate, her score gets closer to the 2-player game score.
  • If 99 he’s cooperate, she cooperates, and 1 he defects, what does it look like from his perspective?

He gets his full 20 points. (She got 9.9). Since there are so many people, his impact is very minor.

  • He can’t help or hurt much. If everyone cooperates, it’s very tempting to take a free ride because the structure of the game is such that he’s such a small contributor that his choice can neither help nor hurt much. The problem is, that’s true for everyone, so everyone ends up defecting.
  • Free rider problem: it is individually rational to defect, but collectively sub-optimal; any given player cannot much effect the outcome, which creates an incentive to take a free ride on other people’s cooperation. This is the commons problem.
  • If one needs to get a collective agreement around a common problem, a little free riding may not hurt. The free rider problem may not be a problem, depending on the situation (if it doesn’t spin out of control). We may still be able to get enough people to positively impact the situation (in a one-shot problem).
  • As posed, these situations are devoid of laws, rules, regulations—that would move the problem from stylized situation into a more institutionalized setting. The decision making shifts and includes what the collectivity decides upon for itself.


  • There are no rules in the Prisoner’s Dillemma, but there IS complete information. Everyone knows the whole picture, and everyone knows that everyone else knows the whole picture.
  • Imagine a different decision-making context in which there is incomplete information on both sides. This situation would lead to bargaining, which opens up opportunities for strategic interaction.

2 different structures: Distributive bargaining and integrative bargaining.

Distributive Bargaining—F-150 sale
o 2 parties, 1 issue
o Both parties have the same objective (best price)
o She (seller) wants highest price possible, but knew she could get $5,000 from dealer—this is the seller’s reservation price
o He (buyer) could get another truck for $8,000—this is the buyer’s reservation price.
o If they come to an agreement at $7,000 (or anywhere between 5,000 and 8,000), they’re both doing better than their best alternative to a negotiated agreement. They both win; this is a joint gain.
There is a zone of potential agreement (ZOPA) wherein both sides are doing better than their best alternative to a negotiated agreement. No single solution is right; it’s indeterminate. When you have indeterminate outcomes, you open up alternatives to strategic interaction. There are also no rules.
o From her perspective, she knows her SRP, but not his BRP. She knows there’s a range, but she doesn’t really know where it is. One way to understand strategic interaction is that she’s going to start making offers to try to figure out what his reservation price is. If you add in probability (probability of the other side’s reservation price), she can determine the probability distribution for where his reservation price is. Once she determines where his reservation price probably is, she makes a last and final offer that’s as close as possible to that price. He’s doing the same thing and trying to anchor the negotiation as near as possible to her end of the price spectrum.
o One tactic she might use is anchoring. She opens up the bargaining high so that he thinks her reservation price is towards that higher end of the spectrum. If she opens up too high, he might turn around and walk away—if he walks away, they both leave value on the table (they both could do better if they come to some agreement within the zone of potential agreement).
o Imagine they come to a tentative agreement at $7,000 and keep negotiating till get to $6,000. In that move, the buyer gained $1,000 and the seller lost $1,000. Sum comes to 0. This is a zero sum game.
• Another zero sum game: territorial conflict—Country A wants to move a border to take up X amount of land that is currently part of B. A gains the same amount of land as B loses. This solution would be zero sum. A negotiator asks Country A why it wants to move the border and discovers that there’s a forest in the section that A wants, but there’s also a lake that B wants and can get if they curve the line a bit—this is the zone of potential agreement. A gets the forest, B gets the lake. This is integrative bargaining, and no longer zero sum. Also consider the example of dividing an orange—if the bargainers explore their underlying interests to discover that one wants the peel, the other wants the juice, you can both win by dividing the orange differently.