Home Depot and Lowes can hire a gardener to maintain a common area for $110 for

Question

Home Depot and Lowes can hire a gardener to maintain a common area for $110 for each of the three summer months (June, July, August). Each month that the common area is maintained, Home Depot expects to gain $100 more profit and Lowes $50 more profit.
Before June, Home Depot confronts Lowes over its share of the maintenance cost. Home Depot presents its offer. Lowes either accepts it for each of the three months, or rejects it and returns in late June with a counteroffer. In late June, Home Depot either accepts that counteroffer for each of the remaining two months, or rejects it and returns in late July with a counteroffer. In late July, Lowes either accepts that counteroffer for the remaining month, or rejects it and the bargaining game is over.
What percentage of the gains from trade should Home Depot offer? How much should Home Depot offer to pay? Should Lowes accept that initial offer?

Explanation / Answer

This is a spin on the economics game "ultimatum" (http://en.wikipedia.org/wiki/Ultimatum_game). From a strictly economic perspective, neither home depot nor lowes should offer or agree to pay more than they expect to receive from having the common area maintained. Since Home Depot wants to maximize profits, theoretically, they should offer to have Lowes pay $49 and pay $61 themselves. However, as you will have seen from the link, people are not likely to look kindly on being low-balled (they take offense) so we'd probably advise HD to offer a bit of a premium to Lowes (say 20% - again from the link) so were we HD we'd say, "hey lowes hows about you pay $40 and we'll cover the other $70" so Lowes makes and additional $10 and HD makes an additional $30.

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