Chapter 7 Noncooperative models of bargaining

Abstract

Publisher Summary This chapter focuses on the noncooperative models of bargaining. John Nash's (1950) path- breaking paper introduces the bargaining problem, and his pioneering work on noncooperative bargaining theory was taken up again and developed by numerous authors. The target of such a noncooperative theory of bargaining is to find theoretical predictions of what agreement, if any, will be reached by the bargainers, thereby to explain the manner in which the bargaining outcome depends on the parameters of the bargaining problem and to shed light on the meaning of some of the verbal concepts that are used when bargaining is discussed in ordinary language. Three directions in which progress has been particularly fruitful are (1) sequential models have been introduced in studying specific bargaining procedures, (2) refinements of Nash equilibrium have been applied, and (3) bargaining models have been embedded in market situations to provide insights into markets with decentralized trading. In spite of this progress, important challenges are still ahead. The most pressing is that of establishing a properly founded theory of bargaining under incomplete information. A resolution of this difficulty must presumably await a major breakthrough in the general theory of games of incomplete information. From the perspective of economic theory in general, the main challenge remains the modeling of trading institutions (with the nature of money as the most obvious target).