William F. Samuelson

Status Quo Bias in Decision Making

Most real decisions, unlike those of economics texts, have a status quo alternative—that is, doing nothing or maintaining ones current or previous decision. A series of decision-making experiments shows that individuals disproportionately stick with the status quo. Data on the selections of health plans and retirement programs by faculty members reveal that the status quo bias is substantial in important real decisions. Economics, psychology, and decision theory provide possible explanations for this bias. Applications are discussed ranging from marketing techniques, to industrial organization, to the advance of science.

Bargaining under Incomplete Information

This paper presents and analyzes a bargaining model of bilateral monopoly under uncertainty. Under the bargaining rule proposed, the buyer and the seller each submit sealed offers that determine whether the good in question is sold and the transfer price. The Nash equilibrium solution of this bargaining game implies an offer strategy of each party that is monotonic in its own reservation price and depends on its assessment of the opponents reservation price. Issues of relative bargaining advantage and efficiency are examined for a number of special cases. Finally, we discuss the appropriateness of the Nash solution concept.

Competitive bidding with entry costs

Abstract This paper presents a simple model of competitive procurement, in which potential bidders incur non-recoverable resource costs in preparing bids. The main findings are that equilibrium entry achieves a welfare optimum but that expected procurement cost need not decline with increases in the number of potential bidders.

I Won the Auction But Don't Want the Prize

The “winners curse” occurs in competitive situations when a successful buyer finds that he or she has paid too much for a commodity of uncertain value. This study provides an experimental demonstration of the winners curse, and identifies factors that affect the existence and magnitude of this bidding abnormality. In an auction setting, two factors are shown to affect the incidence and magnitude of the winners curse: (1) the degree of uncertainty concerning the value of the item up for bid and (2) the number of competing bidders. Increasing either factor will increase the range of value estimates and bids, making it more likely that the winning bidder will overestimate the true value of the commodity and thus overbid.

Game theory and business applications

Game theory has been applied to a growing list of practical problems, from antitrust analysis to monetary policy; from the design of auction institutions to the structuring of incentives within firms; from patent races to dispute resolution. The purpose of Game Theory and Business Applications is to show how game theory can be used to model and analyze business decisions. The contents of this revised edition contain a wide variety of business functions – from accounting to operations, from marketing to strategy to organizational design. In addition, specific application areas include market competition, law and economics, bargaining and dispute resolution, and competitive bidding. All of these applications involve competitive decision settings, specifically situations where a number of economic agents in pursuit of their own self-interests and in accordance with the institutional “rules of the game” take actions that together affect all of their fortunes. As this volume demonstrates, game theory provides a compelling guide for analyzing business decisions and strategies.

The Object Distribution Problem Revisited

The object distribution problem calls for a number of indivisible objects to be assigned to a set of individuals (e.g., the division of estate properties among heirs). Some thirty years ago Knaster and Steinhaus presented a distribution scheme based upon object values reported by individuals. The properties of this scheme are examined, and it is shown that the K-S procedure is the only scheme that satisfies a number of plausible equity requirements.

Settlements out of Court: Efficiency and Equity

This paper considers a model of out-of-court settlement negotiations in which rational individuals hold potentially differing beliefs about the merits of the case. The following results pertain in equilibrium. First, under incomplete information, self-interested disputants will fail to attain negotiated settlements (at least some of the time). Second, there is a fundamental tradeoff between settlement efficiency and equity. Increasing the frequency of out-of-court settlements inevitably means adopting settlements that are less responsive to the true merits of the case. Third, the frequency of litigation increases as court costs decline. Moreover, this response can be so great that average court expenditures rise with the decline in legal costs. Fourth, a shift from the American system to the British system of allocating court costs results in a fall in the frequency of litigation.

Auctions: Advances in Theory and Practice

Auctions and competitive bidding institutions are important both for empirical and theoretical reasons. The aim of this chapter is to examine the use of auctions, paying equal attention to theory and practice. While theory suggests equilibrium bidding as a benchmark, there is considerable empirical evidence (from controlled experiments and field data) that actual bidding behavior only loosely follows this normative prescription. Thus, it is important to consider the design of auction institutions anticipating actual bidding behavior. The analysis provides normative guidelines concerning “market” performance. What types of auction institutions are likely to promote efficiency? Alternatively, what auction procedures maximize the seller’s expected revenue? In combination, auction theory and the corresponding empirical evidence can provide direct answers to these questions.

A Game-Theoretic Approach to Legal Settlements

In modern economies, adjudication is the most common means of dispute resolution when voluntary alternatives such as negotiation have been exhausted. This chapter considers the incidence of out-of-court negotiated settlements versus adjudicated outcomes as predicted by the leading game-theoretic model and addresses a number of key questions. How do various offer and acceptance methods affect the terms of out-of-court settlements? Which kinds of cases settle and which go to court? How does private information about the case merits held by one or more sides affect player strategies and outcomes?

Dividing Coastal Waters

In the last decade, the extension of fishing jurisdictions and the expansion of off-shore drilling have given rise to many new maritime disputes between neighboring countries seeking to delimit exclusive economic zones. Because the record of negotiated boundary treaties has been augmented case by case, there has been only partial progress in articulating general principles that should govern the maritime property right assignment. This article treats the task of fixing maritime boundaries as a problem of “fair” division. We present a trio of axioms requiring that the division should respond in natural ways to coastal changes and should be based solely on distances sea to shore. It is shown that the imposition of these conditions limits the division method to the minimum distance rule under point-by-point division or to “minimum distance”shares under an aggregate division.