Bargaining theory

Abstract: Can the outcome of bargaining between two rational parties be determined? Although much of the discussion in bargaining literature revolves around this question, no satisfactory answer has been found. A model based on simple assumptions of rational behavior is developed in an attempt to answer this question. There are two versions of the model: A general model for computer use, by which a great number of different bargaining situations can be studied. A special model which relies on a simple analytical procedure. This model can determine a solution for bargaining situations that fulfill certain conditions as regards the bargainers' profits from an agreement. It can be applied to show that very simple assumptions of rational behavior lead to a unique solution for a fairly large group of interesting bargaining situations. The following examples are discussed: How many shares of the purchasing corporation should be paid for each share of the purchased corporation in a merger? How can two corporations reach an agreement on a market-division? How does a corporate income tax or a wage tax affect labor-management negotiations?