4 Custom Clothiers wishes to purchase inventory from Slick Supplier. If they tra

Question

4 Custom Clothiers wishes to purchase inventory from Slick Supplier. If they trade at a price of a, Custom gets a payoff of 100 - z and Slick gets r. If they do not trade, Custom trades with another supplier and gets a payoff of w while Slick gets zero. (w is a known constant.) The parties bargain as follows. First, Slick proposes a payment of x. Next, Custom accepts or rejects the offer. If it accepts, Custom pays Slick z. If it rejects, Custom trades with another supplier. (i) Suppose that w 100. What are the equilibrium payoffs?

Explanation / Answer

In case of transaction between Custom and Slick, payoffs for each of the parties involved are -

Similarly in the transaction with another supplier, the payoffs for each parties are -

Now, the two situations for value of w and their impact on the equilibrium values are as follows

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