Question

Suppose a record label is negotiating with a band over a contract. The band has no outside options so the evil record label makes a take-it-orleave it offer. The players move sequentially. First, the record label (Player 1) has the option of making a fair (F) or unfair (U) offer to the band (Player 2). Next, the band can then either accept (A) the offer or reject (R) it. If the band rejects the offer, both players get $0. If the band accepts the fair offer, the record label and the band both get $5,000. If the band accepts the unfair offer, the record label gets $8,000 and the band gets $2,000. Write out the extensive (tree) form of the game and solve for the equilibrium

Answer 1

Player 1 has two choices to make a fir order or to make an unfair order. Payer to can then decide about accepting and rejecting the offers the payoffs are :

1) player1 is fair and if player 2 rejects : (0,0)

2) player1 is unfair and if player 2 rejects : (0,0)

3) player1 is fair and if player 2 accepts : ($5000,$5000)

3) player1 is unfair and if player 2 accepts : ($8000,$2000)

below is the tree form of the game where the equilibrium is when player1 is unfair and if player 2 accepts : ($8000,$2000)