# Bargaining theory and applications (EC147)

Brown University, Fall 1999

## Homework

## General description

The course discusses game theoretic models of bargaining. Both the axiomatic and the strategic
approaches are considered. The Nash bargaining problem and alternating offers models will be
the main representatives of the the two approaches respectively.

### Prerequisites

The prerequisite is either EC111 or EC113. We will not use complicated mathematics, but
the students' willingness to follow formal and abstract reasoning is important.

The course applies game theory to study bargaining, however, no prior knowledge of game
theory is required in order to participate. The necessary tools from game theory will be taught as
a part of the course.

### Lectures

Lectures are scheduled for I Hour, Tuesday and Thursday, 10:30-11:50.
The professor may be contacted in several ways.

### Grading

The grades will be composed of the following parts: Homeworks 20%, midterm exam 40% and final exam 40%

## Textbooks

There is no required textbook for the course. Handouts will be handed out
instead. In addition, the interested students may use the books listed below. One should note
that these are designed for graduate level courses, and thus might be difficult for some
of the students.

- Martin J. Osborne and Ariel Rubinstein,
*Bargaining and Markets,* Academic Press, San Diego CA, 1990.
- Martin J. Osborne and Ariel Rubinstein,
*A Course in Game Theory*, MIT Press, Cambridge MA, 1994.

## Outline of the course

- Introduction: game theoretic modelling of economic situations.
- Decision making under risk: the St. Petersburg paradox, and the expected utility
hypothesis.
- The axiomatic approach: Nash's bargaining problem and solution.
- Applications of the Nash solution
- Strategic games in normal form: Nash equilibrium.
- Strategic games in extensive form: Nash equilibrium, backward induction and
subgame perfect equilibrium.
- The strategic approach: a finite horizon alternating offers bargaining game.
- The relationships between the axiomatic and strategic approaches.