The Ultimatum Game

We begin our series of lectures by solving the ultimatum game, in which one side makes a take-it-or-leave-it (also called fait accompli or ultimatum) offer, which the other side accepts or rejcts. If she accepts, then the sides receive the agreed upon division. Otherwise, they both get nothing.

Takeaway points:

  1. In equilibrium, the side making the offer demands all of the good.
  2. Being able to make offers is a form of bargaining power.
  3. We assume that the sides only care about their share of the good and do not have other considerations such as "fairness." If we relax this assumption, the results will change. We talk about this in greater depth in later videos.
  4. Technically, there exists another equilibrium in which the first player demands the entire share of the goods and the other side accepts. However, this leads to uninteresting results and seems inherently unsatisfying, as it seems reasonable to believe that the other side would reject if indifferent if the first side offered nothing.