Bargaining Problem

The two person bargaining problem is a problem of understanding how two agents should cooperate when non-cooperation leads to Pareto-inefficient results. It is in essence an equilibrium selection problem; Many games have multiple equilibria with varying payoffs for each player, forcing the players to negotiate on which equilibrium to target. The quintessential example of such a game is the Ultimatum game. The underlying assumption of bargaining theory is that the resulting solution should be the same solution an impartial arbitrator would recommend. Solutions to bargaining come in two flavors: an axiomatic approach where desired properties of a solution are satisfied and a strategic approach where the bargaining procedure is modeled in detail as a sequential game.