Question 4. Alternating Offers with Discounting You are buying a house and are b

Question

Question 4. Alternating Offers with Discounting You are buying a house and are bargaining with the current owner over the sale price. The house is valued at $220,000 by you and $120,000 by the owner. Assume that bargaining takes place with alternating offers and that each stage of bargaining (after an offer and response) takes one full day to complete. If agreement is not reached after 10 days of bargaining, the opportunity for the sale disappears completely (you get no house, and the owner has to keep the house forever). Suppose that both you and the owner discount the future with a factor per day. All information described above is common knowledge. You get to decide whether to make the first offer or pass and let the owner make the first offer Should you make the first offer or wait for the owner to do so? What would that decision depend on? HINT: Think about the problem as the players bargaining over the surplus of 100K 220-120) and thus each player has an outside option of 0 (in surplus terms)

Explanation / Answer

The house is valued at $220,000 by me and $120000 by the owner. As the players bargain over the surplus of 100K (= 220 -120), and the house is valued at higher value by me. It is not justifiable for me to make the first offer.I should wait for the owner to do so.

As the value quoted by me is on higher side (i.e, $220000) , so I should wait for the owner to make the first offer.If the owner makes the first offer , there would be a surplus of 100K to settle the bargaining terms between the two. Thus both of them would be benefitted.

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