Understanding the Bargaining Problem: Exploring the Models of Bargaining Theory for Negotiation and Decision-making Processes

Bargaining theory

In theory, there must be some negotiated settlement short of war that is mutually preferred to fighting. Therefore, disagreements about relative power are the central cause of war (Blainey). The military and political outcome of the war shapes the bargaining leverage of each side and thus the kind of settlement they would be able to negotiate (L&T).

Bargaining theory is an economic theory that seeks to explain the negotiation and decision-making processes that take place between two or more parties involved in a transaction. This theory is often used to analyze interactions between buyers and sellers, managers and labor unions, or governments and interest groups.

At the heart of bargaining theory is the bargaining problem, which is the challenge of dividing a fixed pie, which represents the total value that can be created by the parties involved in the transaction. The bargaining power of each party and their preferences play an important role in determining the outcome of the bargaining process.

There are several models of bargaining theory that seek to explain these negotiations, including the Nash bargaining model, the ultimatum game, and the Rubinstein bargaining model. The Nash bargaining model is based on the assumption that both parties care equally about the outcome and aims to find an agreement that maximizes the sum of their gains. The ultimatum game is a simple experimental game that tests how people value fairness in bargaining situations. Finally, the Rubinstein bargaining model takes the perspective of the negotiators themselves, examining how they make strategic decisions regarding concessions and offers during the negotiation process.

Overall, bargaining theory is a valuable tool for understanding the complicated negotiation process that occurs between different parties in a variety of settings. It helps highlight the factors that drive individuals and organizations during the bargaining process, ultimately leading to better outcomes for all parties involved.

More Answers: