Question

The owners' and the players' union are negotiating over a contract for the upcoming hockey season. In October, the owners will make an offer to the union. If they reach an agreement, they will share $50 of revenues. So, for example, if the owners offer the players $10 in October and the players accept, then the players receive $10 and the owners keep the remaining $40. If the players reject the offer, then they go on strike and negotiations resume in November. In November, the players will make an offer to the owners. If they reach an agreement, they will share just $20 of revenues (revenues have fallen because of the strike). So, for example, if the players offer the owners $10 in November and the owners accept, then the owners receive $10 and the players keep the remaining $10. If the owners reject the November offer, then the strike continues for the rest of the season and the players and the owners both receive zero. What would you expect to happen in November if there is a strike in October? O A. The players will offer the owners zero and keep all $20 for themselves. OB. The players will capitulate and offer to take 50 percent of the remaining value. O C. The players will refuse to negotiate and stay on strike. OD. The players will capitulate and offer to take 25 percent of the remaining value. Use backward induction to find what would happen in October. For simplicity, assume that if someone is indifferent between accepting or rejecting an offer, they will accept the offer.

Answer 1

Q1. a. The players will offer the owners zero and keep all $20 for themselves.

​​​​​​If the game reaches November, there are $20 revenues to share between players and owners. Players have to propose an offer.

It is given that if a party is indifferent between accepting and rejecting the offer, it will accept.

Players will want to maximize their share. So, players will offer the minimum amount of revenue that would be accepted by owners.

If owners reject the offer, they will get zero. So, owners will accept the offer if they are offered atleast zero. So, the players will offer zero to the owners and keep all $20.

Q2. D. The owners will earn a payoff of $30.

We have seen that if the game reaches November, players will get $20 and owners will get zero.

So, the owners will offer an amount that would be accepted by players in October itself. Owners know that players will accept the offer if they get $20. If they offer $20, they will be left with $30.

So, the owners will offer $20 to players and keep $30 for themselves and this offer will be accepted by players in October.

So, players will earn $20 and owners will earn $30.