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Game Theory: Negotiation between Management and Labor

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Suppose you have a negotiation between Management and Labor concerning Labor wages. Management and Labor do well when they each do the opposite of what the other does i.e. the best situations for both are: (i) for management to bargain hard (offer low wages) and Labor to accommodate (accepts the contract offered) and (ii) for Management to accommodate (offer generous wages) and Labor to bargain hard (threatens to strike).

(a) If Management moves first what would you expect equilibrium of this sequential game to be?

(b) If Labor moves first what would you expect the equilibrium of this sequential game to be?

(c) Is this a game with a first mover or last mover advantage?

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Solution Summary

This solution uses game theory to analyze a negotiation between management and labor. It determines whether the game has a first-mover or last-mover advantage and illustrates the payoffs for both sides with a matrix.

Solution Preview

a) Management anticipates that Labor will bargain hard if Management accommodates, so Management will choose to bargain hard. Labor will then bargain hard to avoid ...

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