A Strategic Concession Game

Abstract

This paper considers a two-player negotiation problem with complete information and non-transferable payoffs/utilities. There are gains to be made by both players if they make bilateral concessions in their actions, relative to the status quo Nash equilibrium (NE) outcome. The failure to agree on a jointly acceptable arrangement has been a major stumbling block to the exploitation of such gains. The paper develops a concession game which has a cooperative trait in the sense that bilateral concessions in actions are sought by both players, but the game proceeds in a non-cooperative fashion in determining the levels of concessions, given a prior agreement over the rules of the game among the players. The game is applicable to a large class of bargaining situations in which both players would benefit from mutual reductions in their decision variables. Two specific applications, a tariff negotiation game and a cartel output agreement are examined.