ECON 4180 Lecture Notes - Lecture 12: Bargaining Problem, Bargaining, The Surplus
28 Mar 2016
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Suppose i have a pizza and you have a television. If we each consume what we individually own, then you will be hungry for food and i will be hungry for entertainment. We could agree to a trade whereby you let me watch television in exchange for half of my pizza. The trade may make us both better o , in which case we say that the trade creates value. Creating value is one thing dividing value is another. Bargaining theory addresses how the surplus is divided among multiple participants. To divide value, people often utilize a divisible good. In the pizza/television example, pizza will serve this role better than tv. In most cases money can facilitate arbitrary division of the gains from trade. Note that bargaining theory does not assume that there will be a price that is determined exoge- nously and given to traders.
