qA

Nash Bar gaining TheorY il

K. Binmcre

l il,{l }lODUCTIO},,;

three retuarliaL,le papers writteil in ttrre eaily 1950s' Nasli ou'tlineii

an
ir
rpproach to the thecrl' of gatnes in general anri to thc theciy cf bargaininr
is the second of
in particular which re¡nains i:f tl¡e gfeatest signiÉicance.1 This
sr,reral chap';ers in which it is intentlcEl to discuss a¡ril to extenii the genera'
approach to b:irgaining orrtlined in those papers'
l\iash attaciled the bargarning pri:bleni fli¡-om tl'¡o di{í'erent directions.
Th¿
detern:ine a u:riclue
Iirst atteck empioyec a set oi axi*¡*s which ire shaweii
tile'N¿¡th
oLrr.ñnis lbr an'¡ b:rrgririing garnr. Thi.t uír,1(illc ouicorl1r is calied
itargaining ssrlution'of th* ganre"'l-he :i\:ctllii i|it*ck involved a s;lecificr
6¡()11-{:{.!oper*iive -fllr':
to
be analysed as ¿ ¡rline'. anell'sis
lrrfain,n! rnt:dei
Nash leads ol i.i¡¡rr:'¿o tirt lt¡lutittíl üLrlcüffii'ü5 ilic
;,r,i,rscil by 'alnr:
nl*thoel v;ils d!r¡clrsse ri ln i:ii*pt':i 1"
:r.l ji-.rnattc t.Te almeut. i!asfi's axicni¡¡tic
,\ bl i,.,f sunlfiiary ci i!.r!s disltrsr;ir¡n is givc* irr scciion ?. in tlle f irrfillli
¡.rri sr:*olld iine r:i'el'taük" Stre tregirl iri rr-
;halrier we shail collcr-'11iíiiti hrt-:
it:ratit.lg ttvo fr.¡ndameniai poiilts n¡l,le ln chapter': sinr.re they
are *qr'ral!1
rrn'¿ortant liere.
'j\lasl"
Ailhrugir th;s *l:rapter iu ¡[s,;t.r1.td tÜ a discussion erf tl¡e classical
it sl-roulri Lr* emprirasized thil{ ive d* nu/ r*g.aril i¡r:l;r't'
rargalnin[ solLltion",
i,.ing ,tiorrrally applicabie tc ai1 twc-per-con i:argainin* probieins l¡i
:'rt i." ;

ir¡ ir l;;ntcr'i
,,, *iu seek to jr¡stify the 'Nash bargaining soiutionu, it will be
,¡f ¡ilük3 rrt} Lrst
rvhere lhe players ccmrnunicate strictiy i* lerms utiiiti*s an{l
li]ay tle tv:r¡jahL'
oi'alternative descriptions of thc pi:ssibie culr:c:re$ which
w1{!i e
!n íi iaier chapter it is intenCe,l tc disct¡ss sc.¡ne bargair:iil* flrolxldnts
oi"barterirrg $ver Ü{rnri|J ''
le ss simplified infbrnlational str;-r*i¡";re" [n the cas*
li,:s" iirr exampie, it wiil bc ilrgr-rcd that, ri"ith thr E::tu{al i*fL¡rllr;rtii''ri¡l
lc;¡ds ri¡¡/ li: tl:r
siructüre in the cont¡¿xt, tire a¡rpiication ol Nash':i P!inrip¡s
'hut tr-r a crlmpetitive eqr:ilibrru::l'
'Nash irargaining soiuticn'

ll,argepartsoíseciir.rtrsland2rt-Íorate1;oirttsmacle!]ic}.iilltc'2.'].i"t¡:lulrit¡;:.e.ll
rhrs chnpter begins with ¡ection 3'
 'ff
'r.!li
$

ll Nash bargaining tlirctY f I f]5

ü: "o¿ash barguining theon; ,¡r fl
Ab.ciract ;¡nswers to ttris qlle$f iol1 havc sollie value irul ii is rnore sati$i3 ltlg
, .rtl
#
I iti, ¡r:Ci}nil ii:ntilrileniai ¡loint Which needs tr¡ be rnade is that l'uash's dil ü'

rl'i,..or-i, *,irs intend*d ic be urtrJerstood a-t a strictiy g#t?l{-tlteoretir ap¡rroach - *l $ to look at specific barguining contests and t(tr see whether their soluticrroi¡t-
hope tr,;-riit
i.e . Nastt !s coilceri¡,:r,,1. with optirnal play iretweell lational lllaye]:s
with * ccnles actually do satisfy the Nash axiotus. In this way one can
tire'F{as}'t tra'gairr-
intlivirJu,ri goais. Likr: flarsan-r-i l.l9'/7) -ncl e:ihers, we leel that it i$ irnportairt 1t
some practical insight inttt ihe circulnstances under which
when it is nr''i i'
tri clistiirguish c¿refuliv betwee¡"1 such ail spproach '¿\1d beh{t'-ioL¿rlzi thecries in¡ soiution' is ap¡.,licable (and equally into those cilcunlstances
,llrii
lri considering approi.rriate b,rrgairiiÍig moclels one has, ilf course, to focus i:n
{i.c. ihcrri*:; nr,hich sr,ek to elescribe whui happens in practice) and etltical
'tll¡

stratr'glc reiellr¡ce to
thetllies ii.c. tltec'iies lvhich prescribe r:utcomes which a¡e optimal firr society
|.r,
1, ihose factors which have, or appear to iiave, a genuine
il{
ihe situation. This certainly dnes not apply to tire trulk of manoeuvres cÜil1'
,as
a wht;ie;. lil particuiar, it is common fbr authors to refer to lhe'Nash ¡l
bargaining soluiioli-ás an aftiilraiion schelne. Such a description invites one
.:1i rnon riuring reailiie negotiations. Under this heaciing t'cr exanipi'; i:ortitr
to consicler whr:ther or liüt Nash's principles are 'fair'and this is an ethical ;l tlattery" abilse, the inducement of boreilom atld othef fiore subtler alleflpi!
qLlcstion rather tl¡an a 'gante-theoretic'one. Whiie this *tirical queiitr(l11 !s l{r put the opponent at a ¡isychological Ctsadvantage. These factc¡r:; ""'ou1il
cloubtless nieiinilxgft¡1. i.l was not a question which f{ash t'as t¡:;r'ing 1o al'rswer' .eítaiiliy h,e olthe greatciit iinportance in ¿ bciravioural analysis but the5'havr:
i¡¡ al¡t, case, thrs cli3pter will be concern-ed strictiv with garlrc{heofetrc no placc in a game-theoretic analysis.,4 raticrral ptla¡,'tr will isnoÍ; iijch
and ilnt
qutrsIions. ,rr*1,,u.,.,..n (assuniing that liis concern is only witil the linal contrlct
wiil-¡ r"he mafiiler in whici¡ it and address hiinstli'':xelustv';1)' t<¡
i"lasir ttlt that the rio:ri il.¡nclar¡rental tvLle of game is what we shall call ¡
rvas reached)
(1¡f¡iL,iil. flr, tiiis is i*'Ui: unrjerstood a forrlal two-person game in eXtt:itsive lire sirali.:gic issuer.
fÜrnl ,¿,l-iich is to be analyted on the assul¡lFtion that uo pre-pla5' ctinlniunic¿- The bargaiftirlg coniest given iry Nesh as typrcai ol-ihc r^:lass ro whicii his
rraei* in
ti0n is perntitteii. Otlier two-persoft ganles were to tle reduced tÜ contcsls ill ir;r.gaintng il,i;ioilrs appiy rnust be vierved in the iip,ht <¡l lhe r*nial'ks
pr"cvieus paragraph' Althougir ver\¡ simplü (the blrg:ini*g 1s reciu':rc irr
th.¡ loliowing way. liu¡pose thal t; is a forrilai garne for wl¡ich sonre pre-play tlre
l!e rnilliing simuiiailrous demanrtrs,\, it caf l -ires
ncvi:fthciess ;lfarl:i
ltrtgoliati{ln is possibie. Tiren on* silould inragine the various fros-rihli sttris i¡t 1,'la;,,crs
clairr
li.rl straiegir: t-$l{ilnce c¡f a r"'idr vi;rir:ty oi Lrin'gailtilg siti¡ati*iis' l'i¿:sh's
ttie pre-piey negc-rtiarion pfoce{.lure i}s 111o"?:i in a Iaiger'negotiation game"¡'1. $'i1h tlir
I-itc iiegotiittiort gaml'.\¡ is then analyse{i ñ-( a conies{ : ird lts soiuiiori iel cis io tlriil the s,¡iutic.r¡ ouicorlic of tiris bargairling {o1l1.i:st icrilt'-:ide:'
is lh*rtllgi* sigrriiicanl ' ulr:i:11"
?r1r (-lLrtcolrre oi G rvl:ic.h rr",t sh;ill cail a ¡;Llg¡ri¿*Íe,:J ot¡tt:ot'"it'c:f
{'-;.'I'he dctei- :r,i1rr.l-r*trir: Nash 'rargilín11lg S(lliltion Ut-rio11

r';iil 5a-rii'S anall,sis ili- {his Patlre i: t}ne wt¡lli''1 r"'iSh'

l-lot r¡uite SLr {:{l11''iil!rliJlll lrS
r¡tirr¡ition of the apprr:1lriate rregoliated eruti:otr¡ir of G lirer':fore rjcpen'-'l
i:iirr- to be and ¡iso on ¡¡ .,\s rx¡rlaineitr in r:hl.rpt*r l. th¿ i¡Jsntiiicatior c,i'a ¡;'-;iufirl:i of a coni*st \\'1r'h
ixr ¡ knllr,letlge ot- tiii: ni:gotiation proce enlplr:1,', r.i

liitt...,vleiJg.e ci the thecll' wtrich tire playcrs rvill '.rse irr resolving tlic ri:,iri!y .nji.sh i: íi{t11ibiie i s not ne':elca r-l lv sl l aigli t ib rit:lr d'
¡,:lntc
ltcliriiii-r | 1.)11 r;otl I est,'\' In this i:heple¡. \üe ür.lli.,lil to tilscus¡ lriash's s;r.:;-iÍ'ic il:,i'¿ailliltg ti¡t;rlel lirii
ln this cliapte¡ ollf al{entiof} 1{) bargain!n3. Ft'llor'viilg hli:i'. rr ':
\\,e íe$iri,Jl :l'rtf ielat¡:d rnoceis. {n pirrfir:uiar. r'ie r¡¡i:ilt t(l point r-:ut rhc ieievatlLc'ol'
!1.tire lrlilrlt ivr:¡til b'i'i:i"i.rbinrti:in {.t:ilapter 3i. $ur *trject is to clarif-v
l!re
dcilni: ¿ bargaiilitrg ("',tf st lj ;rssociattii u'ith a gan"ie 10 be a negotiaii,-rr:
.-rfcLljrsl;r.rrr:rt, tiit¡-it'l rviri;il the i*'¡tllt ol t¿iiutLll b:'lig,arnina wili bs the iriasi;
úr)!1iest in u,liich an! tlail til rltg'.ili¿ltion slr:ategies (one lor eac:l plel¡'*i iirll;)
¡i or else as;ncompatible. 1f i:onrpari!lr ihr:' b,, ¡!,.1: i i; lltg sol u t i,l lt o I a fi il íllríoliirli¿t iC l.l iil : i'iii "
bt ci¡ssil'ied eiiher compaiible
tiir¡i,:t oi tlirsc ri".gr,rlialion strategies res'.rlt: ln a bínding agree ilenl (rolrl'aei i
[-.*irrg síÉned whrlit t];iermines the (possibtr¡ ¡lrixed) slilt'jfl(5 tt' i'L: 'J5cd 3]'
ii,,, pl:ri,:rs i* l; l1 In...)i1lpatible, the cittice t¡i' the se n';gutial"ii.rli strategits
IjASit tsAl{[ir\]l'iIirl{i lll-il ii'Itr{)N
l'1 i::.
r',:sultr; iii a pic-iitcr;irln¡:il outcr:¡ne of C' ;alled the statur cluo'
l1t tii* ü!)tttüIi r,t'lli' t't¡iutal framervt-¡rk ouilined above. Nash's f''argaining
irr this . rve surnma.ri¡-c iiie disr;ilss¡cn oi Na:h's ::'\ii'i'!l'li'
ilrio:ilS ísr.r ,;ha¡rt,:r f i are a:;lrr,lrrrf)tiOnS AilOul the SOiutíOn fJUlc()lIle oi Certrll; se r.:lit,ltl i-'riet1]'

btrl¡t;illt.JllttcSts. Sitire they cleterl¡li¡il a tlllique Outconlc (iu ter:lis r'i' approa(h Sivr:ll i¡t ciraPtct l
r-¡triiiii,,l,). it ioiir¡ws flt;¡1" lt theV are applicable in a ceriaín sitr.¡atii¡n. ilierl
iur gr**ted t hat all the trarp,*ining corltesf s lr) l,.r rrlil¡;ltic¡¿ü
Nash takcs
tl¡r: .qr't . I
tilll ri¡-rsi i¡rpli,:itl,, rlLll.:qdv all t[at ls imrnediately relevant about the ir¡r,c a soiril!on and thaÍ 1li'; solution payi-'ffs dr:p*n¡-l r-¡¡ri) otr
hc slel'.t:i I L;i¡
ir:irrumetl cLinlilact and .:,:nvs." i t.¡f t-e:rsibi¿ ¡:5'rlii ¡rairs E;:d I
barg:rir:iirp ¡:rlr"riJ.rri: i;¡ irsi: anil the game lheofy subscritred fo by the ptr3yers. h¿ writl,erii:r¡
pair '$ therctrre
ir1:,1,,'¡ pair fr. The solution payofl'
111a)¡
fh.l clLir:sliorr ihcr: ¿:¡rtr:-c: rJo the l!asir Lrnrgaining axioms actuaily havc this
o
llíollc11l' t",rr a reasl:t.i¿bi¡' iargt: class r:i bargaining contests'? -Ii.,¿ " &).
=,.
 \
¿:- '"'t¿1 .';{t.,. ,r
:1i 1.,.., üfJ()lll:: .üíe
Nash bargaircing theor"v
ihat f, is r j:. .r-aiue rlf
x #rü fl:::,#rrthe runr:tlon l' tuo,n wtrich it rbijr¡ws
[f 61
Without loss of generality, we norn¡aiize
s¡: that & * S and
trr - f l) {xn - f:) max{x:(x,y)e:.tij:
sub.jecr io th* corls nmx{1,:(::,-1,)e 9f i = I
,; : ; ;' ln Nash's demand ganie, the two players
";; ; :r ::ilI,Í 1, irig va, irc,,r s js ca,,err

r
iji:i;i#;:
{i ts r sari,:;:¡i"' y*1
. i,', *1':j;:'
o,i, oú,r,nr ;i¡rsteaci
.v a¡.id _',.
cluo
Il (x,.r,) € .{
su¡iultaneously an¡rt*-¡u¡rce
cach plr.y*, l*.*iues his demancl.
0 resurts' To excrude trluai eqLr;tibrir, Orir_.r*.,*ne sta(,rs
der¡l¡r¡rds

¿i"rl,T,l,?1'#l*, rhar rhere r, sha* resirict

ranges 0 (x ( I and 0 (.v { r' J.rn*,r., to
r:f x rvirirlr inaxmi¿es in'spite otr this resrrictÍo^-,-,iir*','*rnuu" *r*
i')'fx' ;tl;:"t'-t ntany equilibria. An admissible parr (x.y)
is a lr,trash
,oo
:,-rir.Jccr ri¡ rh* consrr,,-"- -.0:'- ir is a hretocfficienr point :r. To .eiernrine *rr,,,fib,l,;,r., ,iu,rO ,,
r,,rtr trrrgo,,,t,,il",¡-]"ut x ) $ and x € j¿ ..we re'e¡ to s{,-) 'f tt',.,
equilibria is t. he regardecl or rir*r*'.r"y Nasir
whicri "*U.n
tto"' one rnay lhjnk r as an asymrnetric "r
¡',.rr-.<;*pcrltive) solution.
;i{)\\.cr' il,*i; .r,u.n ._ tu m';asuring the 'h¿¡g¿¡¡¡n* is required. We shall discuss the question a conve¡rtion
" of what .""rr",#.,_ *"p.p.npr,or*
a*rúns orire¡s. n* l:-11'f"'"t;;;';;:.rut
u.nru*J.,nr,'r;;";r;;.,; end.rvr iht íirst PJalc¡' selt*nl in ternrs uf the anali'sis glven in section o ,n¿ ,.Jrion r
r,,rriuir 5ir1-r i,.. ,o,. cas¡ is'f rirtic praclical ;:i,:::tt ot
i \,ri! ,t,!r ,-¡ ,¡o."l1"1pit' trtt trürl;l;;i'-t"t
pro*eriure inv<llves rf B is a separabie bargaining contest
is- advantagco;,;";,t one player which.separates into n
¡r.¡r:¡l*r iri¿rglln,", 82,... ,ts , orre may ask: which *asfi Nash den¡nr.l
-
,::1,,, I ; ;,;, ;" j
o,jr,t -j,'I ,,,_T ,:; ¡arnes "91.
rn BvBr"
equilif,r,", O,r*J r.Oaratel¡,
; ":.. [ : Jlt1, ",gn, yield a pareto-efficit.n, o"r.ur". g, riie answer
::f :
ui a tr¡¡q3;:'¡¡r! conlesr ,,,í, ft {$i:lü i5.v'ril
cha¡rer ",";? the palrs of dcntands ¡narje in Br,Bz,...,Bn¡nustÍbr is rriat
ljl ;-)t'l'uli
Iilr ll¡r' \¿sli in rvrirch,,o' 'n''
le iuilirrln
hc ro give ali be aslrnnretric Nash
hlr_q rint;:, Jutuut¡iu rc,r rhe ,, ,rpuruü
l¿s: t,sr.c. u--r,"., i.".ii:,H; but rn i¡,trich ariy is an .rsyn;_
Fre-negcr;rri.,", ui. po,,,r- .HllilX ill;,i',"r sr;;, ali ct whi¿;h cerrrespcncl r' {hr"
{. .._pi:r¡rir,..i
,n sc.:riori S of
'rhe atrove
anarysis is, r:f coLrlsr:, too cl0se
, rirc 1-¡i,reigi:r t¡f
chaprer
2, or¡c. :;heii an-v neu". tight on
rtr 1jlat giver.r in i;rrapter.r
lrr
l'l'.'u **ash\;;;;,;'r.,;:tlh',.)rttnLcrr.,,axiornhasi.¡er;n y,..,issu*
irargrining cú'ltests in whir;ri a soiution_x!.tret,,,*l,rir.á ;;;,;;;";";;Jj::r* ror,*
"J,,'':: :: :' yi i' ;;''' ,ur, ü* idenrified withor¡t
ij iT,c;',,. l:j;;.;
i:,.r;¡, ,,;,;;;
i- ;:1,. "::" *:,T";1';:,'l;,
"j.,,::Hr;;l;:::;.,::ds :l ",;li
r*'rc¿r tn rhe us': {-)! a {i(rn\f-'¡r[trú,1 'r':lrih,
;¡itc"ntio¡r is ccntined.. to a single
gurnr.
ot'ne:.c.si1y. wiir appc:lr
the neecl ti¡
arhr;rar¡ :f.
áuch ec.nlssis can he obtair¡ed
se. rion 5 or
,;r)c;*,;.*,',.,,fj.u,.,n ,,,*
ll':u:.,"
in¡:. Thls to."'" *-i
chrprer t;;;';;.'j::il,,i=,*,:",?n..r
b¡t the arsurne otl'trecl ¿n artejnpt is
lf,',*,ffi til.uj'
bv in trJd uli*s t""il; r rli'ji ure' s
-q
f-¡i.r¡:r
;;;;';;; ri{:r u ii,
;t'-l:::.2 i( nJ: !i'rJ erniinc- :r,?.'1' "rl' .
2 ,, tr".ir,r."t á r)¡ore
¡r.jir\1. r\iLrr)
.utt"; ._u^".-hapter t""''*ttn-l"l'r
JLr'-r¡rürc s,.rbs,rr:-,r. ,n,
casil) Jr:i::¡t¡Jrrl
rll'-'r-
ii r io rns aie cie sig n e
d ?]:,,:#'[f 'i:,'il:::i ;J:,: ;i,Hi:,";:I;iJfi
,lt*:]ti:n iJi
rvheil frre distorting cffr:ct
t¡f trre ex:tra rtr,,ruru-. i:i sufficientll,snll¡, ;:
I., ¡i¡r! !ir¿¡:, ,. ,.
to lr¡ ¡1i
sL;'lutirrn outco!¡le lvilr bg tt¡*;: rh*
,t iJ;c \.:sh ;ili;;;'i"iilil ,,,.':'-tno-'t"..i,,.. "lt,rrl,ll,'Ji,'.,1i:;.;l::"
inrerested
n¡rTrrutiruor",ry--*i.,-, t" the l,iash
hargrini'rg s'ru.
;: _" j);;
1\ ltrJ\(
.",n,r,u.,;r:;:":"iong-er
f I1¡ )t,üOt)IlJri"1ii.,
;li:il::JT* ini¡1jr;; il:fi;:;';.,
ofleri'g an abslr¡,.; rr^*.,-..-
,,ere ni:e g ilLrn. We begiri with an ela,,:rati,:"
r,f or,"*.0r,',ipie ¡¡iven bv *hsh
ti,lS:;
L. n, a\ ri,, j,.,,,.,".,;J":j;,ili"",ri,',*n,*::*:':',1'l':,liirlil: r:
_
;:,::jr j
4 il{ODIITILIt liASFi Illi[,f,¡i¡vD (;A]tE
i
f ,{s in th* sit,pie di:;ra,,,J" gulr::
, TH¿ ¡iASIl IIEMAI{J} bolh piayers sir¡ruiiansoLr¡1.! i,rn';l*rr
* G.d}.'}: $ iieriiends .l :int.l .¡, Ttr*:r.r: ltien
fbllows o .¡rn.a trlo.,;r-, as ¿ resL;it
{ r¡t^i*..itir.l:
fbl,lc"ws, vv's ¿55¡;¡¡- rt tlie players receivr tiii:ir ;g¡¡1s¡¿s
.l:. "1"
¡¿tisiiu.s ^t
rr¡dt '{.\..ls ntti 9¡l¡, coir¡pa{t
¡,rr:l1ll.r., f siatus quo rayi:íTs olC r,,,irh
w:rh probahiiitv pt.r,-r,¡ *r clse r**,rivr"
lh:.i:
an<_l ccni,r:1"
br:t aJs' ,t
probabrliti I *¡.,ir,-t,; "x. r,r:;:il-rl*
is sivcn shorÍiir. rnle,i-r'*ti!ir1.!!!
' J':'x,\>f :J i Il w:il ¡10'r'¿i-"'s ire ¿rssLimed that p is a
"| ({,l-' 't;->g i coi-¡l.ii-lur:rir: !-uriiiüri ¡ntj rh:¡i
\ x -",v and 1..=.{í } =, x €.t- ¿,{.r,j'1.''', * iulrr:¡l (x,.i,)*;1" Althou¡h
,1,,,, i,
t'ueshali alsrrassuluethatpt"r.,r,)=.it.L¡ri;,,,; o", ¡1(rüe;is.:iit {.rlr u;.r; rrqirjtr
I
; thai, unle ss p : l. tliisgarlle l)
er:,{.u.iir_,rr:.il.,,¡-,-1.}rlt.,
j nor a bargainlng contest in lite seilsc r:,f.sÉ"rlJ*rL
g

$
í
$
 tVash ltargaíning tlteory !l Nush bargaittlilg l&eor-r'IJ 6?

i;rter-
I rl pair i-rí rtrafegie$ ,{áilnot sirnply be classilied as compatibie or
br:,;¡:r.rc rr.¡ c// Nash equiiibria of the srnoothed derrland ganle l'Ür a reason*bly
rncon:i::itible. We sl6il , however, be interested in the case when p is clcrse tfi esting class of {unctions P.
we shall suppose that ti.re Pareto boundary (]l:,1.i is the graph {)l tlie
bijec-
i. Tha g:nre cal1 tiiijl-r *e regardr:d as 'approximately'a bargaining colltest" ll'
tive, strlctly tlecreasing, co¡lc¿¡'re function 0:i0' il -" Ii]'
The fulrction
1i., ,:rpc;tc.l ¡rar.;l'is r¡ ritd 12 rcsulting from tlie dertiand pair (x'¡r) arc
givenh-v iir="dp(-rí..1 1andr'2:.r'p(x,/).For(Í,y)tobea|Jashequilibriunr, I '. '.{n [0, 1] will be cleilned ly 6'(.x'f ]: a. where
ive ¡equire thal

.tp{x,y) <ip(i,i)
¿=
a
rl:)
\0,/

,vp{,r=,.y) <ip$,i) The conlr:ur I o is tl¡en the Parcto br:unrlary olthe set a ;"1'
(x,:t):
ln adililir:n to the assumptions nratj,; sr.l far, we siiail alsr: rc'quire firat
0.í.r ( 1 anrj 0 {_¡'( l. At least one Nash equilibriunl ¿lr'.'ays
¡r : Il{} * [0, 1l be of the forrn
r,vh¿ri:.,¿r
rr:,iSts. ¡\ poinl i-r*..r'* i at lvhi*h the function P defined by
p ("r,,t ) = 5 16 1"r..r'))
P1r.,v.¡ : x;7r(;r.-¡ )

fr:L (-x,.1,) € 9f, where g : [0, 1]

* [0, 1] is cr:r¡tini¡uus and decreasirr¡r *n i0' il
aiils.,¿s its maxirnun ielue is s¡¡ch a Nash equiiibrium. Nash pointed ou't th:rt r.ritlr giU!: I and g(0)-0. R*call that ou: airrl is tu slit¡rr
tirilt llle s\ nrnlctrlü
1:,.'+.,r.'*)iies in the si,¿ded regi*n in figure 4.1. lJut, of course, iliere may be equilibria prct"ided
Nash bargaining solution is an approxi¡uatiol.¡ to all Nasir
rtl¡e¡ \ash equililrria lutside {his region" lthis thr sssu-nlption that g is
p suificiently ciose to L We prove
is uttder
:\s p - 1-, it is e',ident that (-t*,y*) i'llust appro¿r{:tr tl,e s,vmrnetLic iriash :'utllce for this purpose
diff'erentiable" althc.ugh a i,veaker ccildltiorl rin g ivill
bargaintn; sc;lution ,:i 1he gal¡¡e. ldash {1953) ref'.ers to thr- game descriireci in ncte 1).
{see
¡:tris sri;iion ¿ls i,t '-i¡¡tr¡otheql l'ersion' of tris simpie der¡rn¡rC game. ile then ab*'vc
A leasibie but not exclusive i::rtt¡prr-latioll ior tire: s*ri-.rrp'describ*d
le¡narlls that th,,- i:j-\ rirmetrir) Flash bargaining solutir:n sirouid be r*gcrded as iti sealed rtiveiopes
is the iollowing- The two 1''iayers pi'tce rireir eieinands
ll're soi;rnc,n üuifjliite q:f the simpie dcnrancl game becatrse it is the rvhicliarethenpasscdtcar*fcrec'Aftertimef.therelereeo}]ensth*)
":nly
r:eresr;.r!' lirn!t c:1'the equilibriurtr p'cints c{'smoothecl Eañle-"1'' doinFatib¡le" su¡-t-l'" such
enveiopes anrj dcteil.nille¡, rvl-,ethfr the r1¡r'rnirnds afe
1\',: sir¡lj not seÉlk t,: defenr:l Nash's remark. lt docs not seevr¡ to br at ail lu pracl.icr the requirenrent thal
rnecti¡*lsr. would scem nece$!aiy to realize
,i*iens:ble as li stand; {see L,gce and f{ailla 19-5"7. p. 142). llstead ll'¿ shall inipll'lhat I
thc dcnrands be 'siriti¡itarleous' (althoush ti¡is-l is flot lneant tr:
¡ienrii,ir:r¡ate that th¿: s,,'tiut:r:tri* l{ash bargaining soiution is an apprr:xinrnti-rn di*count'!irte rr";irt;':
real-life releree is necessary fc,r'this prrrptis*-r. ile pla"cis
a comlnorl cliscount í.actoi 6 (CI < 8 i). i.il,;1.
<l ;. íi¡rie I" ihf sel of f:lesibie
ti{'';' i}:3t!' 'dssurning th;it
O^*ii O-ttt is ür,jil (rvirir:ir iras Pareto bt¡triiilrr'' iilnctiun
I
*,.1., pi*yui. is erluinpec'i l,vith the same i¡:.libahilii3r dist'ribulitlll
i
!

l ¿.,¡¡,*j-, il i-oL tl,e ,andom vari¿rhie

10,
l' ll.icn the probll"'ility thal "{ and

J; wili pruve ciirnpatible is assessed hv both piav':rs as

l---
I
p i"r,,v : Irrtrb (/ ( ?" rvhe¡i:: 0 ir 1"
-l') "' i' ¡
t-'
¡r_
-!
I

/ loe 6 {.";. r' ¡"

1

I . !';'rl¡ (t< -;,"--l

l
\ ldÉo

r loe ¡i{"1", r'J\

-- I
\ -'--_
XV: C == F [
lugó /
- g4r{x, "r')).

}i0tf:ft]a.iafrinctiongcirtailredinirriswaywilli¡*rlit.ferentiirt']'..1tr'tilr
probability derrsrry' lor t
Figure 4.1 Flavers ere giveir a continuotls
 r¡Wl
':sila

Nash baryairting theory ll Áa

ó8 Nash bargaining theory¡ Jl ,ü,
l. Let -8r, denote the sel of values c¡i a at which the maximum Since log@-1 is concave, Í¡llows that (D logS-t)(u) : {ilu' r'r'iiere t}r*
it
Lr¡rin¡a
.orrrOn,-C: I -+- og'(CI)lf (a) is *egative because logf-r is strictiy
riei:reasing
of contradicts the
*r" i*6-'l/.jr
\e,/
*rl) = max {xp{x,-r,)} Br¡t tl.ren Glu is a stri;tly'increasing function r¡ which
.v-<o\l' x corrcavity of log ó-r.
rs attaineC, The n 8r, incrr:¡se s irr the sense that L.ernma2.l-etA'denotethesetofvaluesof|latwhichtirenaximum
)", 1 yz ""+ sup 8r, { inf -8r, .

: *1. {r'p0,:')}
Il'g is dil'ferentiable, th*n 8r, is strictly increasing in the sense that ,?il, {,,t(;)'tor}
r ¡ .í,r'2 * sup 8", ( inf B-u,. isattained..Ilren,4-'increas*s.llgisdifferentiable,then/"isstlictly
P¡r¡t¡.¡. The first part r:Í' the lemm:l is proved bv showlng that, if rl '( /l and increasing.
r, <. ;. then As lernma I '
i?¿,oI
, /.r'\ ú'\ ,, /z' /z\
oo '{l)r,ot <;o-, '{ijsto) * ao-r(t)*r.¡. pt '('BJt'o' The set oí fJash equilibria is the intersection of the irvo
'reacilon sets'

that the aniecedent in this irnplication is true but the consequent is

: i{x,y) :0(x,t) = ll €.1r,}
.,4
Sr.rpirose
faise . Unless 6 : {ix,"r}: t}(x,;r) = c' (] fi-,',r'

' {.u-)se t -- rll-' (¡Jrror (4.1i ln piirticular. (t*,"v*) eA n fj (see fig,i'rie 4'2)'
"o C 5'and fl
ln vielv of lenrmas 1 ¡llicl 2, we nave rhat A C S arrd "s ?-, w}rere

\\'e nlav then conclucie that aleasillustratedinfigrire4,3,Thr;s¡1¡gr:Sr]I.'llgisdifierentiabie"

then all points on 6 .. $4.1*,¡{') :¡re excii,ir.lcd fr*rn ii ar¡ci
?'with the excep'
ll ?'i:; then
,w{*)
{g-'
(.i) -'' (;)}" rsrn; {o '(;)- '' (;)l {4.2i rir-.n oi'(*u,,u*) itseli. Ihe $et S

.Sfi 7''= itx,-r',1 :{¡,.r'i>(-v*,.v'*) or {'r,.v}<ixo'.i'r}i '

Irui ¡. decreases orr 1il, i] and so g(a) )g(p). Thus

since all i\ash equilibri;i lie rn s r'-l ?" rt iollc;ws thal all
Flaslr ,:quilihrie iir'

a-ti.,,ci- ó-t1zia) p-tX.r'lÉ)

-ó
tQ,'P)
in lh,; region shadeii in figurc 4"4. ]'lcnce the Nashbargairlings':lutronapl'':':;"
14 1\ p is s*fiici*rrtly clos* t* i .
r'l0 -' z tg ylfi -z!8 nrates a1l these Nash equiiitlria, p'rr:lvided ¡¡61

Br;t thrs contradicts the assurnption tliat rp (aild hcnce 0-r) is concave.
tl{4.i ) holcis, then Át{e) +g(P) Lrecause CIÉ-1(,vlo) is strictly incruasing in
e. How*ve¡. only weak inequality cari be ilsserled !n (4.1). f'{everli"leiess. (4.3'
;.i:nrains true because nLlw g(e) > g(13).
Ft;r the seqpncl part ol the lern¡la, we also have thatg is difíerentiable" trf ¡n::\--
,9.,, is noi strictly increasing, then there exist,vr and yr with.ll {¡2 such tlrat *--:iSt*>
:,...:p8.r. :
iul'8_r,. But" io¡ all .u satislying y1 .í.v ( 12, we have that sup/i.',. .( S:i-\\ü.--
-:\+^-:$ll\
Nash
equ ilibria
rnf'r?,,, ( sup"8r, d int 8.r.. lt i,¡llows that there e.''iists * such {liat ¿3,, : {*; {'rir '..\:'S-\,\
-r', {.r, "(-y2. l}ut, then, fs¡_¡;1 {.1,<...1,2.
'\¡\if\
*N,.',,,1\
,,
o-{*n' (,)'t"ü > a > n.{,*o' (i)'*ü ( I ,"I

r:: d so. li:r.r'i/a "- ¡1 1. .i;2f ti,

( I + qs'{n)lg{e) { a(D* log4-r) f igurt'4.I
uiD, lo¡q4-1¡ (u) (u)
 ;iit{H
W
,*asJr,Sargalir ing theo n' I I
j1Íi1
Nash bargaüring thct;r1' IÍ ?l
:iili¡i:

kpown to the players at thi: instant their dema¡rd:; bet:ome ei'fective is n¡t
( ,: pariicularly realistic. lts usefulness therelore depends on the exterlt to rvhich
\. .l;'i., '¡:;1.':.!'.ú
\.; it retains the significant features of less ideaiized situations" ln tit* prerious
srcli0¡1, r,ve reiaxed the ret¿uirenent that the piayers are per{'ectly iniormed
about the set r:f available payoff pairs. ln this sectiori lve relax instead thc'
requireíilent that the players nlake sill¡ultaneous demands.
Specificalli., we shall assume that at tin¡e ¡ : 0 the first player rnakes a
tail-- d{x" de¡riand r.vhich is eitl'rer accepted or rejected by the other player' lf accepted,
,y" }

rhr negotiatiolts term'rnate with the iirst player receiving lris denrand and the
Figure 4..1
second playe r receivi?ig the maximum utility consistent with the first player's
payr:l'.l. Il the first ill:ryer's demancl is rejectrd, the ncgotiations continile w;th
ihe seccnd t,,t,,tng a demand atier a titlre interval I wliich the iirst
Fla'',e,
player can either acce¡rt cr reiect. And so tl¡1.
In order ro injecrt $ornc sense of urgenr:y into tlir: negotiations, rve supl)Üse
r-ha*. t j.re pla-vers react ¡egaiively to the delay of an agreenleilt. This is mt¡cleiled
by assuming that the sel ol feasible pa1'off pairs at I'inlc f is
:.)J,'= !{S{.t, 6l-r. ) : ("v " r') e :,-;li J

* xy=c
,"',,herc ü <61< I ancl {,r.ió:'( l. {iiir a:lsitn¡ptionsabout t}ie set"-,1"s: --,t'ivill
,\
l¡e th* s;,ime :ts jn rirlcticll 4. Ncte" ltc.t'¡ever. that we Cepart frcm secf lcll J i;l
\____ aiii.rr,;in¡:, thepia-v-crs io ilavc possibl,v rlilii:rerti discor.¡ni laies 8r ancl $2' ln
F'igure 4.4 the case that r'o 'Jairianrj is *r'er accepter:tr. ure :iuppolid that both plal'ers
receive 0. i'he ¡tatus quc is therefore 0.
Gam*¡, uf this kind have been corlsidered bv varic¡l;s aulilors inotablv
,\,:r¡e .'. 'fire roildil;on {hat g is differentiabie is not essential lar the ab,¡ve Sráirl {1a"i ?). For tlie purposes of this chaptei. }torvev*r. ihe rigniflc;iiit v"orl;
resuit. .^\:r :deqr-rai.e s;:;liient üonditiofl is ri.lj,pe;rf s in i:ira¡lter 3. trlubinstein clescrii:es tl¡e set -*i nerfect e4rriJrfir;t;ilr
L-\ut;cllrif5. fc¡ a class üi ijarlfls which irli-'iucles thai desCribcrJ abor'e {:r""
t,; L lt) Srx) t1-r .l ¡t g(.\)
fi g . - lr:;: uii { irnr sup -, D-g{i) ;rote 21. !n peilicular. hi.; argunent shows th*i, in tlre case¿lthe liarg:i'r.ing
;.--d /¡ ¡rqOl it cfrÍltest described above, th¿ie exists a tii?iq¿.rr perlell eqsilibriun: oulcctl-i"]e
l,ci e¿,:¡ "'.. {-ilir:; is a';¡lied in ia.4) of lemma l.} if tilis condition is nr¡t satis- isee uoii: 3). The soluti*n ¡,f the gaílte can thereforr be icl*ntified quitr:
ireii. ir ii¿r be thal multiple Nash equilibria can be found oÍ) a contour unequivar:aiiy. Gi,,,en F.r-rbiltsrcin'., r*slt1t, !t is qu!te exs'y' t{) show tlt¿t the
0l.x..l'i: a. l-i'irs happe:'is. tor exaniple,ir' the case wüen @(x).= 1 --x and s{llulion o'Litc}Íne is an a'¡:proxin}atioll to ihe 'ar;'vfir¡iütri* biash bersain!nrl'
sclution' r't'iih'bargaining pou,'tI' r $herc
ítt - /(; -vr.i (: <. rr';
' r) - I : (I 1og ü2

rrhere ir -r,r'{1 an,: i}dl{m.Each point on x-l-1;:r¡: is t}tcii a Nash

"= t''*¡-Gt
*r.1uilib ir::iii proriried tirat the timr: ii.il-er'';ai f between ::Ltc';essi'¡;i dcn'ren¡1s is suf!'i¿ie*lir
"

J },{ODII;IIID NASH DE},íANI} GAI{I]
Tl:e ret,,.;.:,Jmrít in the simple Nash denrand game that the players make
sr¡nr¡irari.:¡us ilrniands and that the set <lf feasibie payoff pairs is perfectly
snrall(Ifür:Sl,weolrtainthec¡dinary'N;:shbLrgaining'sclution'{ll¡t'hiih
r = o; .\ Ul aurrise. tlit srnailer rhe vrlue ol f. ihe cluict ll.r :il: lr '¡\i'"'r;::"" i'
ii tl¡e cesr ili which dernantls are t¡¡ade simuitartcously'
fiiven the exisfenfe ol ir rtrlique perf'ect cqiiilibr'i:-irll o$trl"li)e i¡'t' l'tl'
it is obvicus that this must be as in figurc 4.5a (in u'iri;i'l q''t il;tv,j used liic
nr¡tatir.rn o¡..,s1'i. Fl¡irrrc 4.5h iilusllatcs tlie uniqi,;.r ¡;eri'ect t{.lti¡lii"rr.luirr
 ?1
Nash borgaining theory II Nash buryaining theory trI 73

rvir ere
j
i
(¿lx!,aiY?)
_-4,
p: --l_L.
toloxr, .1;%l
f--- .-'--.
--\--\ {J1X2,d?y?} * _ _t
I
t-- _
I -'Á'i.12 I A, A2
t-',- The solution outcome o1 (and its companion o2) are lherefore fournd L1
x1,Y1l
f=-..-'
t'. drawing the unique chord lor which
l

'r 4r
srr :
-j_-
¿, RTz: _j - ¿,
\
) lz¡
,t3r \
\ \ sR 1-AiAz' .RS l-ArA2
_.' \ \ *l\ \
Observe thatü+ras I'+0 * anci fi -, 1- r as I+0 *, where
Fígure 4.5a and b k:g ti 2
' iog 6r -l- iog ó2'

b : {0,ó} Jfrr: 'asymrnet¡ic Nash bargaining solutir:n'q(") lvith'bargaining power'i is

iocated at the point I in figure 4.7 where Sfl15fi =- r'.
Jzb It is evident that both {r1 and ü2 ap¡rfoximate u{") f"r smal1 enough values
ol T.
Jih (x2,Y2l = o2 Nole that. in the limit as ?'*0-l . it cioes rrot matter whicl'r piaver opens
the bidding. Each player receives the same r,r'hether lie goes first cr srcond"
(xr.Y1) : ü¡ But the lirnlting oL¡lcorne does r¡of s*tisiy }dash's :tyrnrnetry axicm rniess
( -_(

r.\
r)\ - U2.
Nate 2. I{.ubinsteir¡ in chapter 3 gives a iist of assuilr¡:tians under whi';l¡r !ii;
I
llier:rem holds" These refer to the ¡rreferences the players li.oid o';er- p¿ri¡s
{s. ri of possitrle c}r¡tcomes. ln Rutrinneln's not¿tio¡. s € [0, i] labci' rhe
I

I
i \..,.
I
possible demarids and t denotes the time at p,,hicl¡ rire demand is made. h¡ ttie
"
¿: {4.0)
Fígure 4.6

poirrt (x1" },2) rvhich is obtained in trre correspondíng

garne in which the
se cond piay'er rnakes llie opening demand.
{Jne can think of the bargaining situation at
f he ath stage as a one-period
barg'inirr¡1 garire ln which the púyer to make the demaná has "bargarning
¡rower' r' *- I a'd the stati¡s quo consists the solutíon ol the bariarn,rng
'f
contest which ensues if the demand is refused.
i' order to characreri¿e the points (Xr,yr)and,(X2, ),2). we introduce the
cliords illustrated in i'igure 4.6.
It is easily shown tliat .r\
or:on+(1--c)b -------r---\- n
o'z:(l--f)a+Éb {-ígure 4.7
 ,'Vas& rlrrryarnW thelry' It Nash bargaining, lkeorv ll 75

s¡;.*iai c¡se i:ri-isid'¡rei! i¡r this cltapter, one ntay label the demands fiy the rrquireil fbr different sets:.1'). 1'lris nray tre atf.ributcd to lhe lact tllat the
iitiiitv that the first pia¡'*r rvoulcl rective if that denri¡¡td had been rnad€ and ir?cotiati{}n ¡..rocedure lormalil:eri is "incomplete'. Cive n tire opportr'rnity. tlie
;{.r*()pIed ái tinle 0.'trh* iirst piayer's preferences are ther¡ rl'¡scribeci by the plal,ers will prefix the tbrmal negotiations with firrtlrer negiiiialions in which
iiriliii. iiirriiion y r(s.lr: Atr.i and the seci¡nd player's by 'úz(s. ¡i: ¿tiP{s.}. rhf question ol'wi¡o goes lirst'is rliscL¡ssed. As a result of these: prr:-negoiiations,
'J
ci prel'e;eni:eE clturly satisfies all of Rubinstein's assuniptir.rns
1'lis sr',ciei'ii some compromise between the two extremes o¡ arld gz will bc rcached.
r\c*pi ptlssib!1 the last {A"5) in so far as it reiates to the secünd player's This viewpcint perhaps iends some interest to prr:viding al¡ axio¡natic
irreíerc;i;es. Ti¡c rcleva*t *ss*nrption is that the fu¡rction e defined by ui-raracterization of theset2{'"Y"8): {sr, sn}.
(s + e(s). 1)'" 2(s, 0) Axioln I {invariance). Frir any strictly incieasing af'fine lransformation
"'Í :R? -n trR?,
lnirease-i rvith s. kl ,:.rlr rotation we have that A2@{s + e (s}}:4(s). Since
p d*creases. €{s}.:l li ¡r:i s * e (s) increases" From the r.:oncavit-v lip we have 2(A.:1, A.il: A2(:Y,&)
tilri.lor sr { s.,.
Axion¡ [I {efficiencY)
o(.5r| -r(ir) p1s2* e(s2))- Q{sr l- É(r1))
¿\X.ü q el't t. t"!.
J: --'5t (s2 * r{s2)) - (s¡ + eisl))
Axliom¡ Ilf (inriel¡endence of irrelevant alternativ*r.;)

: ort{ Ll'2__ t!! :( í; €) e 6"1 q X * 2t'g' t"): I (;r' g)

I

(s:-s ,) 'l- (e( S; ) e(s1)¡ i

A^ trt¡ln lV { rr,t'ttolttnicil¡' )

:rnd henee
{e.7 and :.. {!{,8 e et'iL7)* I(-: g): :{ -t:f)
e(s:) -- E(sr) 2 ia;t -- i) (sr _' ¡r) ), o
!\ itir these axioms oile may demonstrale the e¡istel:ce c¡l coustants e arld B in
a:i litquirec. ir-. 1l :uclr lli,rt f {;l €}: 'J ,. 7r.' r^. ltttr'
-\i,lre i. ln Rubinslein's notation, the first player's pavoíls at perfercl 5r,
- ':ci'
Rr'.
--::0
rquiiibr:a in r¡"il;trh he cplrrs the bidding are the x-coordinates o1'poirlts in ,s,q fis
the sc-i
¡'"¡* ügure 4.8.)
,j: .-'ix..t,) : -¡, :d1(x) and x :¿lz(.r')].

lThc ,i ¡cr..rrdin:ites irie lirc tirst player's payofTs wtrc'n the second pla¡rer
lpens th¿ bidding") lile sct A is a closed line segment parailel to the iine
-r..=.r'. i¡ ¡ur lase ar(-t¡ = J1x and dz]i): ó-t(ArÉl,t'j) so rhat A rcdrii:i:s
tLr a sirigie poirt.

)it¡te 4. It"ira'v be r';,:ith notillg that the casc wc i:tli"lsider in this chapt*r
is not su,:h a sgreciai lnsl¡ncc ol liubinstein's result as it ma1'appear. Ii liis
üssr-rnlptio¡1 tliat '¡rie'rrii'ti¡nr'' are evaluated separately is extenrlecl so thrt
'¡rie l,-rtte ries' :lild 'tirle .lotte¡ies' are evaluated separalell'. t ireorem I of
.:lrrpte:': restiliis th* torms available for the player"s utiiit]'funcilons. Il
olie lh;:n rei¡ilirrs unii'oirnity over ail tirnes, it then foilows riiat a piayer's
utiliiv *if i,s, t ) miist i¿lke ¡-rne of the fornis Ó(s)ét or 6|isJ -- r:r.
,\rb¡e i. It'
7- is ;rr:t close to ¿€ro, then the soiu'iir.¡n c¡i the bargr¡nir¡g -,-----:@-
D
rontest 'rhicil thr: l'irst ¡:iayer opens the bidding rvill not be.tn 'asvrr':netric
in
\ash bargainlng solr,rti,,-rl;' (in the serrse that dift*re¡rt '"'alues oi r wili l:e Iiígur¿ 4 .8
 Naú lnrgaining theory II
W
REFERENCES
ffi
.ff
3
H:isanyi, J. C. 19'17 R.atíonal Behaviour and Bargainin,g.Equilibria in Games $
and Sr¡cial Sirua/i¿¡ns. CIJP, Cambridge. $
"$
Lu;e, R. D. and Raiffa, H" 195?: Games and Decisions. Wiley, I\ew yo¡k.
\ash, J. F. 19-S0: The bargainin¡¡ problem. Ecpnometrica, 18, I 55-62. q
\rsh, J. F. 1951: Noncooperative garnes. Annals of Mathernatics, 54,286_95. 11

rt
Naslr, J. F. 19-53: Two-person cooperative garnes. Econometrica,2t, l.2g-'4}. 3
5iáil" L 1972: Bargaíning Thtary. Economics R.esearch Institute, stockholm.