Note: this is an economics question. Game theory and Nash equilibria section. *Discuss the attached case in terms of eBay's strategic move. **Cheap Talk in eBay’s Best Offer Market**In addition to auctions, eBay allows a seller to offer to sell a good for a specified price. The seller may allow a potential buyer to respond with a *best offer* of a lower price. The seller may accept the best-offer bid, decline it, or make a counteroffer. The transaction is completed when a buyer or the seller accepts the other side’s offer.Backus et al. (forthcoming) suggested that some sellers use cheap talk by posting an initial price that is a multiple of $100. Items listed in multiples of $100 receive offers that are 8% to 12% lower and are 15% to 25% more likely to sell than are items listed at similar “precise” prices such as $109. Thus, these round numbers may provide information that helps both parties: The seller makes a quick sale, and the customer buys at a low price.

The study of behavior in settings where the results of one's choices are contingent on those of…

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ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

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Note: this is an economics question. Game theory and Nash equilibria section.

*Discuss the attached case in terms of eBay's strategic move.

**Cheap Talk in eBay’s Best Offer Market**

In addition to auctions, eBay allows a seller to offer to sell a good for a specified price. The seller may allow a potential buyer to respond with a *best offer* of a lower price. The seller may accept the best-offer bid, decline it, or make a counteroffer. The transaction is completed when a buyer or the seller accepts the other side’s offer.

Backus et al. (forthcoming) suggested that some sellers use cheap talk by posting an initial price that is a multiple of $100. Items listed in multiples of $100 receive offers that are 8% to 12% lower and are 15% to 25% more likely to sell than are items listed at similar “precise” prices such as $109. Thus, these round numbers may provide information that helps both parties: The seller makes a quick sale, and the customer buys at a low price.

Definition Definition Economic decision-making framework that analyzes how different players optimize their outcomes with given pay-offs corresponding to their available strategies. The assumptions of game theory are: The number of players or competitors are finite/limited; All participants are rational The rules of the game are known to every player; and Each participant has a finite set of actions. A common way in which game theory is presented as an ( m x n ) matrix in which m represents the strategies of row player and n represents the strategies of column player. There are several limitations of game theory: Many businesses have a large number of competitors, and selecting an optimal strategy in these circumstances is difficult; Real-life business operating environments are full of uncertainty and difficult to model as a game theory; and The assumption of rationality and utility maximization isn't always an accurate portrayal of human nature.

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