Chapter 35 Cooperative models of bargaining

This chapter discusses cooperative models of bargaining. The axiomatic theory of bargaining originated in a fundamental paper by J.F. Nash. Nash introduced an idealized representation of the bargaining problem and developed a methodology that gave the hope that the undeterminateness of the terms of bargaining could be resolved. The canonical bargaining problem is that faced by management and labor in the division of a firm's profit. Another example concerns the specification of the terms of trade among trading partners. The chapter presents the classic characterizations of the three solutions that occupy center stage in the theory as it stands today: the Nash solution, the Kalai–Smorodinsky solution, and the Egalitarian solution. Solutions to abstract bargaining problems, most notably the Nash solution, have been used to solve concrete economic problems, such as management–labor conflicts, on numerous occasions.