A Reverse Ultimatum Game
Some advice for those who consult.
Posted July 6, 2022 | Reviewed by Vanessa Lancaster
- Firms connecting service providers with users gain from having privileged information.
- Service providers are at risk of being underpaid or not paid at all.
- Service providers can gain some control by stating their demands first.
It is well-known what a middleman is: he is a man who bamboozles one party and plunders the other. —Disraeli
Middlemen–or middle persons–make money because they have an information advantage. They know parties that need a service, and they know parties able to provide these services. Middlemen flourish since the service seekers and the service providers do not know each other. The middlemen make the connections. Making connections does not require much work. The profit margin should be handy (Biglaiser & Li, 2018; Judge, 2022).
Middleman firms, hereafter “M,” have an interest in their clients, “C,” not knowing how much the providers, “P,” receive for their services. Likewise, they are interested in P not knowing how much C pays M. If M charges C the amount of X and pays P the amount of Y, then X – Y is M’s revenue, which is to be maximized.
As a recent dip into the middleman world inspired this post, I may well open up with that story. An M firm with offices worldwide contacted me from Dubai (why not?). They said they had a client needing guidance with questions about “cultural values.”
Given my background, they wrote, I could consult for about 50 minutes and be compensated for my time. When I asked what it is in my background that suggests relevant expertise, I was reassured that the issue was “cultural values.” I suspected M was fishing and that they did not have much insight into my background. This encouraged me to try a reverse ultimatum game, knowing I had little to lose (Krueger, 2021).
Ordinarily, this sort of situation could lead to a regular, though biased, ultimatum game such that M would offer a small amount, say $200, for the effort, which P could accept or decline.
If P declines, neither M nor P earn anything. If P accepts, both get paid, and P is left wondering how much more M is getting for making the connection than P is getting for actually doing the work. P does not know X – Y, that is, M’s cut which is what makes this ultimatum game a biased one. As a game with asymmetric information, the biased ultimatum game favors M. Being in the dark about X, P worries about accepting a bad deal or vetoing a deal that is, in fact, fair.
Note that in this game, fairness is not neatly defined. In the ordinary experimental ultimatum game, a division of funds is considered fair if the party proposing the deal and the party invited to accept it receive the same amount (Güth et al., 1982). However, in the middleman scenario, opinions on what is fair may differ widely.
P can address, but not eliminate, these worries by moving first. Playing a reverse ultimatum game, P can, as I did, advise M that he is interested in providing the service and that the fee would be a wholesome amount, say $1,000.
Now it is up to M to accept or decline the offer, and M, unlike P, can make this decision in light of full information. It might be the case that the requested amount Y is greater than the amount X, in which case M must decline. It is also possible that M regards the difference between X and Y as insufficiently attractive and thus declines. If M accepts, P has the satisfaction of receiving an attractive fee, although some uncertainty remains as to whether a better deal might have been possible.
I did not hear back from Dubai. I may have lost a small bit of income, but I avoided the sneaky suspicion that I might have been taken advantage of. Middleman firms might be well advised to be clear and up-front about their compensation schedules, what services they are seeking, and why they think the provider is the right expert for the job.
A take-home message of this tale is that it is better to give an ultimatum than it is to receive one. To the receiver, the finality of the veto power may seem attractive, but the receiver cannot hope to do better than fairness. The proposer, in contrast, may face the uncertainty of being handed a ‘veto,’ but only the proposer might end up with an advantageous deal.
As to the middleman firm operating out of the 16th floor of a Dubai high-rise, their tactics of shielding information may be a well-honed business practice. Their success depends, in part, on their ability to play the numbers. If a good sample of potential providers is at hand (email reach-out is cheap), someone is likely to take the bait and work for peanuts.
Biglaiser, G., & Li, F. (2018). Middlemen: the good, the bad, and the ugly. The RAND Journal of Economics, 49, 3-22.
Güth, W., Schmittberger, R., & Schwarze, B. (1982). An experimental analysis of ultimatum bargaining. Journal of Economic Behavior and Organization, 3, 367–88.
Judge, K. (2022). Direct: The rise of the middleman economy and the power of going to the source. Harper.
Krueger, J. I. (2021). How counteroffers change the ultimatum game. Psychology Today Online. https://www.psychologytoday.com/us/blog/one-among-many/202104/how-count…