Bargaining problem

The two-person bargaining problem studies how two agents share a surplus that they can jointly generate. It is in essence a payoff selection problem. In many cases, the surplus created by the two players can be shared in many ways, forcing the players to negotiate which division of payoffs to choose. There are two typical approaches to the bargaining problem. A normative approach that studies how the surplus should be shared. The normative approach formulates appealing axioms that the solution to a bargaining problem should satisfy. The positive approach answers the question how the surplus will be shared. Under the positive approach, the bargaining procedure is modeled in detail as a non-cooperative game.

The Nash bargaining solution is the unique solution to a two-person bargaining problem that satisfies the axioms of scale invariance, symmetry, efficiency, and independence of irrelevant alternatives. According to Walker, Nash's bargaining solution was shown by John Harsanyi to be the same as Zeuthen's solution of the bargaining problem.

The Nash bargaining game is a simple two-player game used to model bargaining interactions. In the Nash bargaining game, two players demand a portion of some good (usually some amount of money). If the total amount requested by the players is less than that available, both players get their request. If their total request is greater than that available, neither player gets their request.

Nash (1953) presents a non-cooperative demand game with two players who are uncertain about which payoff pairs are feasible. In the limit as the uncertainty vanishes, equilibrium payoffs converge to those predicted by the Nash bargaining solution.

Rubinstein also modelled bargaining as a non-cooperative game in which two players negotiate on the division of a surplus known as the alternating offers bargaining game. The players take turns acting as the proposer. The division of the surplus in the unique subgame perfect equilibrium depends upon how strongly players prefer current over future payoffs. In the limit as players become perfectly patient, the equilibrium division converges to the Nash bargaining solution.

A two-person bargain problem consists of:

The problem is nontrivial if agreements in ${\displaystyle F}$ are better for both parties than the disagreement point. A solution to the bargaining problem selects an agreement ${\displaystyle \phi }$ in ${\displaystyle F}$.

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