McMillan Chapter 6
Using Information Strategically
Negotiation usually take place in uncertain
Who are you negotiating with?
Asymmetric information implies that:
Some negotiations might breakdown
There could be a source of bargaining power
It requires more “creativity” on the part of the
It might create delays…that are optimal!!!
Informational disadvantage I
Your opponent holds some information that is
useful for you
Example: you are the seller facing fanatics and
You want to screen your opponents
You offer a smaller share today than tomorrow
Justification for sales
It requires that the those that want to deal early are
those that hold the information you desire
Normal customers are more impatient fanatics
Those dealing today are more impatient than those
Informational disadvantage II
Sometimes commitment is preferred than trying to
figure out who they are:
Example: if there are a lot of fanatics you are willing
to pay a seller to credibly fix the price
In Bargaining you are stubborn on the offered share
This depends on
How much you value the present
How much your opponent values the present
How willing are you to reach a situation where no
agreement is possible
Being stubborn sometimes is rational!!!
Not dealing sometimes is rational!!!
Informational advantage I (?)
You hold some information that is useful to your opponent
Example: you are the fanatic and you want to tell that to
You want to signal who you are
You take an action that is costly for you and is more costly for
you if you are lying:
Example: is more costly for normal customers to offer a
high price than it is for fanatics
Put your money where your mouth is
For you to convey information is costly: private information
sometimes is a curse
When is this the case?
Informational advantage II (?)
If you are on the side of the negotiators that hold private
Example: you are worker
There are many types of people on your side
Example: different productivity
You can use signal to say who you are:
Example: getting a degree, work for relatively small pay
but increasing over time (corporate career), work for free
sometimes (summer jobs, trainees).
Sending signals is costly but allows you to separate yourself
from other people that might reduce your payoff even more.
Private information is a blessing (you separate) and a curse
(you need to separate).
What is a signal?
It can be anything that:
It is costly.
It is more costly for those that do not want to
It is known that it works as a signal.
There is, in a sense, a notion of “irrationality”:
anything is possible.
The irrationality comes from trying to match
economic use of signals with the common sense of
Example: quiche and beer.
Signals: It is known that it works as a
These raise the question:
How do we know this?
An awful equilibrium:
I believe that all my opponents are tough.
They will never offer me anything in any negotiation.
I get into a negotiation and they offer me nothing.
“See…they are all tough!!!!”.
If your beliefs are known then you are driving that
Conclusion: show what you think when it works in
Firms usually give things away in order to convince people
that the quality is good.
This is a costly signal…therefore they must be good.
If things go bad then it must be a mistake because…only
good quality goods are given for free.
PROBLEM: also low quality goods are cheap.
This is not a good signal. Not even high prices are a good
Example: market for clothes.
To establish quality the only signal is that you’ve been in the
market for a long time: reputation.
Signaling when there are multiple rounds can be difficult
because of those that enter for a few rounds.
McMillan Chapter 7
International Trade Agreements
The Theory (?)
Free trade is good
Market forces drive investment and consumption
Efficiency is achieved
Free trade is bad
Market forces drive investment and consumption
Equality is not achieved
Free trade causes some problems in the short run
Adjustments to new competition
Unemployment in some sectors and shortages in
USA: a lot of social scientists and very few
mathematicians and engineerings
The World Trade Organization has succeeded in
Other barriers still remain
Political games inside the countries
Strategic use to develop new industries
Is there some rationale on barriers to remain
The WTO game
What I do affect many people.
I am affected sometimes even though I am not in the
If everybody decides to open their economies…
It is a good idea for me to close it a little bit
No law: except…
Except for very few cases: all the countries remain
Stick and carrots
Sticks: increasing my barriers
Carrots: lowering my barriers
If we all behave we try to give everybody a carrot
If somebody misbehave: we all give him sticks.
The very same organizations requires the use of
How it works?
As long as it is clear what rewards a carrot and a
stick we all try to follow the carrot path
It is not always clear to figure out when somebody
has raise his barriers or not:
Is “buy American” a barrier or not?
Is “dependence on foreign” oil a barrier or not?
Are the “Green Laws” a barrier or not?
There are many possible outcomes due to many
countries and many directions of bargaining
There is incomplete information:
Breakdown and delayed
How it works I
Agreement on reciprocity (focal point?):
I have to concede on a particular amount of money
The change in the tariff multiplied by the imports
It does not make sense in economic terms:
It has to measure the future impact and the past
It might not be even relevant
It is useful as a coordination device:
Remember the 50-50 split
How it (does not) works II
Non tariffs barriers lack this coordination device:
Negotiations are wide open and all the incomplete
information plays an important role.
It increases incentives for countries to develop techniques to
increase their bargaining position:
Increasing the opponent cost of not conceding by creating
Creating internal commitment to retaliate and internal
commitments to increase the outside option (use of non
Important: agreements are only sustained if there is a threat
fro breaking them:
Sticks need to survive if we rely on mutual agreements
without international courts.