Does Competition Affect Social Preferences in the Context of a Bargaining Game - Essay Example

Draft Does Competition Affect Social Preferences In The Context Of A Bargaining Game? Discuss. Number: Introduction Various experiments have been carried out in order to establish the effects of competition on social preferences particularly in the context of bargaining game. This essay will focus on the ultimatum game as one of the major bargaining game as well as focusing on the carried out studies about the same topic to establish whether competition has any effects on the social preferences. Social preferences in this case are referring to the partialities covered in experimental economics, behavioral as well as social psychology that comprises of interpersonal elements such as fairness, equity, altruism, and reciprocity. Economics approach on these social preferences assumes that people are rationale and prioritize their personal interests before those of the other people. On the other hand, bargaining games are defined as a situation whereby at least two or more players are required to get into a consensus concerning how to share a given amount of goods, money, opportunities, or any other resource that might be of common interest (Wilkinson and Klaes,  2008, p22). In bargaining games, both parties try their level best to get the most favorable deal by getting into a fair agreement with the other party. Bargaining in labor unions, directors’ negotiation for wage increase as well as dispute between two communities or parties over distribution of a certain resources, territories among other elements are good examples of bargaining games (Wilkinson and Klaes,  2008, p23). To explain how competition affects social preferences, the writer will first focus on the Ultimate Game model. Ultimatum Game (UG) refers to a popular test that is used to analyze specific bargaining behaviors. It is a test of self-interested model that involves two players interacting to decide how to share a given amount of money. The game is commonly applied in economic experiments and the condition behind the game is that the two players must not be familiar with each other and that the game must be played only once between these two particular players. In this case, one of the players becomes the proposer while the other one becomes the responder. Both the required to share a given amount of money with the proposer being the main determinant of the mode of division to be used. The responder is given an option of either accepting the proposer’s offer or declining it, in case the offer is accepted, both get the amount shared according to how the proposer had made the offer, if the respondent declines it, both parties walk away with nothing (Camerer, 2003, p55). According to economist’s models, it is assumed that players are supposed to be rational and selfish, meaning that the proposer will offer the smallest share possible to the responder. On the other hand, the responder is expected to accept the given offer since declining it would simply mean that he or she would get nothing. Carried out experiments show that responders who keep on demanding more are likely to get more even though related studies show that players hardly apply rational strategy. Occasionally, offers made the proposer range between 40% and 50%, while on the hand there is a very high likelihood of responders rejecting offers that are below 20%. However, it appears that most people are interested with the interests of the other people in the competition and are highly sensitive to fairness and cooperation. This makes both parties to get a lower outcome than they would have gained if they could have acted according to the self-interested model. During the process of playing the Ultimate Game (UG), it is clear that people are not just interested with material rewards only, but also emotional (psychological satisfaction) (Camerer, 2003, p46). This puts the responder in a difficult dilemma of whether to reject the offer or to accept it especially if the offer is highly unfair. Many experiments have shown that most of the responders who are given unfair offers tend to go through a difficult moment of emotional conflict, wondering whether to reject the offer on basis of unfairness or simply accept it on rationale basis since rejecting the offer would mean losing even the small amount that he or she was likely to get. Rejection of the offer rarely occurs unless the responder’s anger to unfairness supersedes his or her rational choice of accepting the given offer (Kahneman, and Tversky, 2000, p26). In most cases, this occurs as the responder try to punish the proposer for unfair and selfish treatment by making him or her loose the money. In this case, the word fair refers to the ratio that both parties may feel most comfortable to share the given amount of money and not necessarily an equivalent splitting of the reward (Camerer, 2003, p55). The evenness of the game can be illustrated using Nash equilibrium analysis whereby it is assumed that the smallest amount of money or goods available is x and the amount is divisible in 1 unit amount. According to the theory of self-interest hypothesis, the responder is likely to be given 1 unit by the proposer, which in this case is referred to as the equilibrium. The offer made by the proposer is (x, 100-x) and the responder is likely to accept any offer that is close to 100-x. This is referred to as the Nash equilibrium and is highly determined by the credibility of the strategy applied by the responder. This is because the proposer who is both selfish and rationale knows that there is a very high probability of the responder accepting any offer that is almost fair since it would be worth rather than getting nothing. This makes the proposer make the lowest possible offer to the responder meaning that the proposer is likely to get the highest amount of money. Social preferences of the players seem to match with self-interest hypothesis in a well competitive environment. This model is applicable in a number of situations whereby competition is involved. It is both applicable in the market and non-market bargaining like in solving political disputes between countries and communities just to mention a few. The model also shows how competition can affect social preferences in the market environment such as in labor disputes, bargain for salary increment, and bargain for acquisition of important economic resources among others. There exists a general presumption that if the level of competition in the market place is very high, social preferences are likely to be negatively affected. Theoretical results as well as experiments carried out about market claims that high levels if competition makes people behave in a selfish manner and tend to forget social aspects such as fairness, equity altruism, and reciprocity. This can be used as the base for explaining the anomalies experienced in the labor and other markets related situations (Camerer, 2003, p55). Numerous market experiments have been conducted beginning with Smith (1962 and 1964) experiments about market competition to the theoretical research by Fehr and Schmidt in 1999 (Chaudhuri, 2009, p28). According to the studies, it was revealed that competition makes market participants to behave in a self-interested manner. However, some other studies show that there exist a relatively large number of people who are not just self-interested. They show that some people care about the wellbeing or the interests of the other people despite the situation that they may be subjected to be it competition in the job market or any other. These studies signify that some people are always willing to promote fairness irrespective of its cost, which may at times involve sacrificing their own resources or desires. Nevertheless, the studies show that even though these individuals are willing to make sacrifices for the sake of preserving social preferences, it only occurs to people who know each other and people who have helped one another in one way or another. This is unlike the theoretical analysis by Fehr and Schmidt of 1999 about ultimatum game, which was portraying both the responder and the proposer as rationale self-interested persons. Other controversial studies show that social preferences are irrelevant irrespective of the level of competition in the market place. Experiments have also shown that social preferences tend to magnify if the parties involved interact repeatedly to a point of getting to know each other better or forming relational contracts (Chaudhuri, 2009, p35). It may also be magnified if the proposer is looking for a reputation for his or her trustworthy conduct. In conclusion, social preferences may or may not be affected by the level of competition in the market and non-market place. Some studies have shown that most of the people not only care about their interests but also the wellbeing of other people they relate with. The question of whether social preferences are affected by the level of competition can therefore be termed as controversial since some people tend to care about the interests of other people while others seem never to mind about the welfare of other people. This is highly determined by personal traits of the involved individuals as well as their motive among other aspects. Studies show that people tend to observe social preferences in case they know each other, or if the proposer is likely to get a reputation out of his or her good social conduct. According to the Ultimate Game model, both the proposer and the responder are assumed to be rational and selfish individuals whereby the proposer is expected to make the lowest offer possible to the responder. In most cases, responders tend to accept the given offer unless their emotions such as anger and frustrations supersede their rational reasoning hence deciding to reject the offer primarily so as to punish the proposer. Ultimate game is a type of bargaining game that involves two players namely the proposer and the responder who are given a certain amount of money to share in the ratio they feel most comfortable with. The proposer makes an offer to the responders where by the responder bargains for an increase especially if he or she feels that the offer was unfair. Most experiments show that proposer make their first offer within the range of 40 to 50% with offers less than 20% being rejected. The almost equivalent offer made by the proposer signifies that most of the people in the society or in the market place tend to be mindful of the interests of the other people in the same organization. Therefore, the answer on the question of whether competition has an effect on the social preferences particularly the bargaining game can be both positive (yes) or negative (no) as explained in the essay. Bibliography Camerer, C. 2003. Behavioral game theory: Experiments in strategic interaction. New York, N.Y: Russell Sage Foundation. Chaudhuri, A. 2009. Experiments in economics: Playing fair with money. London: Routledge. Kahneman, D., & Tversky, A. 2000. Choices, Values and Frames. Cambridge University Press Wilkinson, N., & Klaes, M. 2008. An introduction to behavioral economics. Houndmills, Basingstoke: Palgrave Macmillan. Read More