rules of the game Our discussion of eompetitive response focused on several well-defined eneounters where the "rules of the game" were well-specified and understood. A larger question addresses the "rules of the game." Retum to the haggling example in the text where the buyer had a value of V = 4, but the seller' seost was privately known to be either 1 or 2. Let 8 denote the probability the eost is 1.

a] Who should own the object, buyer or seller?

b] Suppose buyer makes a take-it-or-Ieave-it offer. Plot buyer's best offer as a funetion of 8. What is seller's best response?

e] Change the rules so sellermakes a take-it-or-Ieave-it offer. What is seller's best offer? How does it depend on seller's eost and on 8?

d] Why does trade aIways occur in the seeond set of ruIes but only in some instanees in the first? Whieh set of ruIes does eaeh player prefer?

AppendixLO1