The process of negotiating the terms of a trade. Bargaining occurs in formal economic contexts (for example, between a firm and a union over the wage rates) and in informal settings (for example, within the family over allocation of domestic chores). It is also of major importcmce in the political process. Economic theory provides both positive and normative perspectives on bargaining. The positive theory represents bargaining as a game of strategy and attempts to predict the outcome. The most influential analysis in this literature is the Rubinstein bargaining model that analyses the outcome of a bargain between two impatient individuals. The Rubinstein model assumes bargaining takes the form of alternate offers of how to share a surplus. The equilibrium solution shows that the share obtained by each party is determined by their relative degree of impatience. The normative theory of bargaining has focused on the characteristics of a desirable outcome from the bargaining process. The Nash bargaining model is founded on a set of axioms that describe desirable properties for the outcome of two-person bargaining. Only one outcome satisfies these axioms: the bargain must maximize the product of the gains to each party from the bargain. The concept of bargaining is also central to the resolution of externality problems described by the Coase theorem.
|Reference: Oxford Press Dictonary of Economics, 5th edt.|