Andrew wants to purchase Adam's car. Andrew is prepared to pay a maximum of $2,000. Adam is not willing to accept anything lower than $1,000. Suppose that any failure to reach an agreement reduces Andrew's and Adam's gain from reaching an agreement by 10 percent. If there is no limit to the number of negotiating rounds, how much should Adam accept for his car?
A) $1,000
B) An amount that is somewhat greater than $1,500
C) An amount that is somewhat less than $1,500
D) $2,000
E) None of the above since Andrew and Adam will be unable to negotiate a selling price.

Question

Quizplus · Accepted Answer

Adam should accept an amount somewhat greater than $1,500 because, in a negotiation with no limit to the number of rounds and a diminishing return from failure to agree, both parties are incentivized to reach an agreement within the overlap of their acceptable ranges ($1,000 to $2,000). The midpoint of their ranges is $1,500, but given the diminishing returns from not agreeing, Adam has an incentive to settle for slightly above the midpoint to ensure a deal is reached before the diminishing returns significantly impact the potential gains for both parties.

Andrew Wants to Purchase Adam's Car