 life, when an employee bargains for a higher salary, or when the owners of a company negotiate with his striking workers. At the end of the bargaining process, one party makes a “take it or leave it” offer. If that ultimatum offer is accepted, then it leads to a resolution. Otherwise, sometimes both sides have to suffer substantial financial losses. Under the limited scope of this essay, we will only look at the simplified version of the ultimatum game.
In this game, players will be divided into proposers and responders (receivers) and then bargain about the distribution of a fixed amount of money. Firstly, the proposer has to offer a share of the initial surplus to the responder. After considering if the share is fair enough, the responder can accept or reject. In case of acceptance, the receiver will receive the offered amount and the proposer will receive the remaining part of the initial amount. In case of a rejection, both players receive nothing.
In 1982, the first experimental test of the “ultimatum game” had been conducted by Guth, Schmittberger and Schwarze, three economists at the University of Cologne, who were studying bargaining behaviour. Back then, Guth and his colleagues recruited a group of graduate students and group them up to form 21 pairs. The proposer was given a fixed sum S of money and he had to announce a split of that amount between himself and a responder .After considering if the offer x is fair enough, the responder can accept or reject. In case of acceptance, the receiver will receive the offered amount x and the proposer will receive the remaining part S-x of the initial amount. In case of a rejection, both players receive nothing. At the first sight, the game was expected to be easy if all of the responders only care about their material outcomes, they will be willing to accept any positive offer and the proposer will offer the minimum amount to get the most. It also means that there will be a unique Nash equilibrium when the proposer offers nearly zero and the responder still accept. However, it turned out not to happen that way. One-third of the proposers offered exactly half of the initial amount responder and more than 80% of them offered the responder at least 20% or more of the amount available. 10% of the offers were rejected. This result is very surprising as the proposers offer more than they have to while in one particular case where the responder was offered 20% but still rejected. Surprised and intrigued, Guth and his colleagues decided to carry out the experiment again but observed behaviours still illustrated a significant deviation from the equilibrium.
Reporting the results, Guth et al commented: “The main reason seems to be that the rational solution is not considered as socially acceptable or fair”. Chaudhuri (2008) reported that for further studying, Guth and his colleagues asked the students to participate in other much more complex versions of the game but the outcomes was very consistent, even when Camerer tried again in a different country in 2003. These results vigorously proved that not the inability to understand the game but their idea of a fair offer that matters, and indeed it can be explained by so called “social preferences”. It indicates that people are not primarily interested in maximizing their monetary payoffs in particular or his utility in general, they also pay a lot of their attention to other social norms like fairness or inequity-aversion. In other words, people tend to resist inequitable outcomes and they are willing to turn down the offer even in “at a cost to themselves” to move in the direction of a more equitable one. (Wilkinson,2008).
In an attempt to dig deeper in the competition in the ultimatum game, Roth et al (1991) carried out the experiments and observed variation between bargaining data and market data across four different locations – Pittsburgh, Ljubljana (Slovenia), Tokyo and Jerusalem. Proposers in each country were asked to split 1000 tokens, which will be converted to real money at the end of session. But now, there will be two