Compute the subgame perfect equilibrium

Reference no: EM13197055

Consider the alternating-offer bargaining game with three periods, in which the players discount payoffs received in successive stages according to a common discount factor d = 0.9. Player 1 makes the first offer of how to split a surplus of 1, followed by either acceptance or rejection of this offer by player 2. Acceptance ends the game, and the surplus is divided as agreed. If player 1's offer is rejected, player 2 then makes an offer in period 2 which player 1 can either accept or reject. Acceptance ends the game, and rejection leads to player 1 making a final offer in period 3 which player 2 is free to either accept or reject.

Part a Draw the relevant game tree.

Part b Compute the subgame perfect equilibrium, clearly specifying the complete contingent plan representing each player's equilibrium strategy.

Reference no: EM13197055

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