Molly is interested buying Polly's antique doll house. Molly is prepared to spend up to $2,500. Polly will not sell the doll house for less than $2,000. Suppose that any failure to reach an agreement reduces Molly's gain by 15 percent and will reduce Polly's gain by 25 percent. If there is no limit to the number of bargaining rounds, what percentage of the bargaining surplus will Polly receive?

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Quizplus · Accepted Answer

Polly has a stronger bargaining position because the failure to reach an agreement affects Molly more negatively than it does Polly (15% loss for Molly vs. 25% loss for Polly). This means Polly can leverage her position to secure a larger portion of the bargaining surplus. The bargaining surplus is the difference between Molly's maximum ($2,500) and Polly's minimum ($2,000), which is $500. Given the asymmetry in how a failure to reach an agreement affects them, Polly can command a larger share of this surplus. The exact percentage can be calculated using the Nash bargaining solution, which considers both the bargaining power and the disagreement point of both parties. In this scenario, Polly's stronger position due to the lesser impact of disagreement on her gain implies she would receive a significant portion of the surplus, around 41 percent.

Molly Is Interested Buying Polly's Antique Doll House