Cooperative bargaining

Cooperative bargaining is a process in which two people decide how to share a surplus that they can jointly generate. In many cases, the surplus created by the two players can be shared in many ways, forcing the players to negotiate which division of payoffs to choose. Such surplus-sharing problems (also called bargaining problem) are faced by management and labor in the division of a firm's profit, by trade partners in the specification of the terms of trade, and more.

The present article focuses on the normative approach to bargaining. It studies how the surplus should be shared, by formulating appealing axioms that the solution to a bargaining problem should satisfy. It is useful when both parties are willing to cooperate in implementing the fair solution. Such solutions, particularly the Nash solution, were used to solve concrete economic problems, such as management–labor conflicts, on numerous occasions.^[1]

An alternative approach to bargaining is the positive approach. It studies how the surplus is actually shared. Under the positive approach, the bargaining procedure is modeled as a non-cooperative game. The most common form of such game is called sequential bargaining.