Bargaining and markets

Abstract

I recall speaking on bargaining theory in the late seventies and being told by more than one unreceptive audience that "bargaining is not part of economics."The publication of this book makes it clear how far we have come since those barbaric times.In the seventies, bargaining theory was an esoteric branch of cooperative game theory.Those with metaphysical leanings, who nowadays would invent refinements of Nash equilibrium, would then invent abstract axiom systems for "cooperative solution concepts."The properties of these systems were then investigated with little or no concern for the applicability of the ideas under study.Questions about the circumstances in which the axioms might apply were brushed aside.Are your axioms principles of social justice?Do they describe what a fair arbitrator would do?Are they an attempt to characterize the bargaining behavior of actual people?Or do you follow Nash in regarding the axioms as being about optimal bargaining between rational agents?If so, what are the circumstances in which the rational agents bargain?Who can do what and how can they do it?Not only were such questions left unanswered, but a virtue was made of not answering them.So long as one avoids committing oneself to a specific interpretation of a set of abstract assumptions, the conclusions can be represented as being very "general."Remnants of this attitude still survive.It remains commonplace to argue that the advantage of working with cooperative game theory is that it yields results of great generality, whereas the conclusions of noncooperative theory are very special to the extensive form examined.But, if two slightly different extensive forms lead to sharply different predictions of the bargaining