Wednesday, October 21, 2015

Excel Homework Due 10/27 at 11 PM.

The homework is on bargaining.  Note that M&R have a discussion of bargaining in Chapter 5.  You should read that.  The model they go through has both the buyer and seller having two types.  In the Excel homework, the model has a continuum of types on each side of the bargain.  In that sense it is harder but also more elegant.  And, I believe, it should give you a better understanding about the relationship between the private information and the inefficiency  created.

There is a fiction in the model that helps to understand what is going on.  The fiction is that there is a third party - an arbitrator - who provides rules for how the bargaining will happen, when trade will occur, and at what price.  The fiction is necessary because the model is static.  Real world negotiations happen over time and to model that correctly one needs a dynamic model.  There are such models, but they are well beyond the scope of our class.  So we will keep the modeling relatively simple and wave our hands about what happens in real world bargaining.

There is a rather extensive discussion in this homework before you log in.  I encourage you to read that carefully and not gloss over it.  It is about how to bargain well and what happens in real-world procurement, which entails a good deal of such bargaining.  There are practical lessons here that you can carry over to your work life, even if you don't engage in procurement.


  1. I'm having trouble figuring out the price that accomplishes equal gains from trade. I think it should just be gains from trade divided by two, but that doesn't work. Any thoughts?

  2. Remember that the price will be somewhere between the seller's cost and the buyer's value. The gains from trade measures the difference between these two, but you need to do something else to get the level of the price correct.

  3. Replies
    1. The gains from trade = v - c. When the price is p, the seller gets surplus of p - c and the buyer gets surplus of v - p. What value of p makes those equal?

  4. How do you find the price that maximizes the sellers gains from trade when you're just given cost?

    1. Note that there is some discussion after each question. That discussion has some of the algebra in it. See if you can figure it out from that.