In Economics and Social Sciences Working Papers Series Bargaining

This article is a survey on bargaining theory. The focus is the game theoretic approach to bargaining, both on its axiomatic and strategic counterparts. The application of bargaining theory to large markets and its connections with competitive allocations are also discussed. Journal of Economic Literature classification: C7. Bargaining In the simplest definition, we refer to bargaining as a socioeconomic problem involving two parties, who can cooperate towards the creation of a commonly desirable surplus, over whose distribution both parties are in conflict. The nature of the cooperation in the agreement and the relative positions of the two parties in the status-quo before agreement takes place will influence the way in which the created surplus is divided. Many social, political and economic problems of relevance fit this definition: a buyer and a seller trying to transact a good for money, a firm and a union sitting at the negotiation table to sign a labor contract, a couple deciding how to split the intra-household chores, two unfriendly countries trying to reach a lasting peace agreement, or negotiations out of court between two litigating parties. In all these cases three basic ingredients are present: (1) the status-quo situation, or the disagreement point, i.e., the arrangement that is expected to take place if an agreement is not reached; (2) the presence of mutual gains from cooperation; and (3) the multiplicity of possible cooperative arrangements, which will translate in different ways to split the resulting surplus. If the situation involves more than two parties, matters are different, as advanced in von Neumann and Morgenstern (1944). Indeed, in addition to the possibilities already identified of either disagreement or agreement among all parties, it is now conceivable that an agreement be reached among some, but not all, of the parties. In multilateral settings, we are therefore led to distinguish pure bargaining problems,