Tuesday, January 06, 2004


The new, tiny, 4G iPod retails for $250, $50 more than 256MB solid state players and $50 less than the (larger) $300 15G iPod. I think that this is the correct pricing -- it's slightly too much than what I would be willing to pay and feel I had gotten a bargain, but not high enough that I can dismiss the product out of hand.

Behavioral economics has this game called the "Ultimatum Game" where the first player offers some fraction of $1 to the second player. The second player can accept the offer, in which case the first player gets to keep what's left, or the second player can reject the offer, in which case both players get 0.

Game theory predicts that the first player should only offer a penny, and that the second player should accept it because hey, 1 cent is better than 0 cents. In reality, an offer that low is almost always rejected. The optimum split, the split that gets you the highest expected value as player one, is a 60/40 cut in your favor. 40% is too high for player 2 to reject, and yeah he would like at least 50%, but he will probably accept 40 cents over zero cents. The moral of this story is that rational agents insist on their 60%.


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