14. rules of the game Our discussion of competitive response focused on several well-defined encounters where the "rules of the game" were well-specified and understood. A larger question addresses the "rules of the game."

Return to the haggling illustration in the text where the buyer had a value of V = 4, but the seller’s cost was privately known to be either 1 or 2. Let θ denote the probability the cost is 1.

(a) Should trade take place?

(b) Suppose buyer makes a take-it-or-leave-it offer. Plot buyer’s best offer as a function of θ. What is seller’s best response?

(c) Change the rules so seller makes a take-it-or-leave-it offer. What is seller’s best offer? How does it depend on seller’s cost and on θ?

(d) Why does trade always occur in the second set of rules but only in some instances in the first? Which set of rules does each player prefer?