Non-Cooperative Bargaining Theory: An Introduction

Abstract

The paper provides an informal introduction to some of the main themes of the recent literature on or bargaining models. It focuses in particular on the relationship between the new approach and the traditional axiomatic approach exemplified by Nash bargaining theory. It illustrates the new insights offered by the non-cooperative approach, by reference to a detailed analysis of the manner in which the presence of an outside option available to one of the parties will affect the negotiated outcome. Finally, the difficulties which arise in extending this analysis to two-person bargaining with incomplete information, and to n-person bargaining, are discussed. This is a revised version of the fourth Review of Economic Studies Lecture presented in April 1985 at the joint meeting of the Association of University Teachers of Economics and the Royal Economic Society held in Oxford. The choice of lecturer is made by a panel whose members are currently Professors Hahn, Mirrlees and Nobay, and the paper is refereed in the usual way. This paper aims to provide an informal and elementary introduction to an approach to bargaining which has received a great deal of attention over the past few years. The approach involves writing down some particular sequence of moves (offers and replies) to be made over time in the course of negotiations, and then looking for a non-cooperative equilibrium in the game thus specified (in practice, a perfect equilibrium, or in games of incomplete information, a sequential equilibrium). While the approach appears at first sight to be very different in spirit from the traditional axiomatic approach-in which a bargaining solution is specified by appealing to a number of general requirements which are deemed appropriate on the basis of some a priori considerations-the two approaches are in fact complementary. While the