As per John Nash, “a two-person bargaining situation involves two individuals who have the opportunity to collaborate for mutual benefit in more than one way”. The problem can be considered a nonzero-sum two-person game. The basic concept of bargaining is illustrated in the example below.
Amy wants a raise. Her demand is $40 per hour. She is about to discuss the matter with her employer, who can be in one of three states.
1) the employee values Amy < $40
2) the employee values Amy = $40
3) the employee values Amy > $40
We inspect the last case. The employee values Amy > $40, say $75. The situation is divided into three parts
1) Any wage between $0 and $40, Amy will reject
2) Any wage above $75, the employer will reject
3) The value between $40 to $75 will lead to a mutually acceptable deal. It is known as the bargaining range.
The bargaining problem looks at the various possibilities of mutually acceptable settlements and tries to theorize how a particular solution can be arrived at.
John F. Nash, The Bargaining Problem, Econometrica, 18 (2), 1950, 155
Bargaining 101 (#1): Introduction: William Spaniel
