Economic Theory of Bargaining

The Economic Theory of Bargaining explains how two or more parties negotiate to reach an agreement that benefits all, based on their respective outside options, preferences, and power. It suggests that the final deal depends on each party’s alternatives if negotiations fail, and their willingness to compromise. The theory uses mathematical models to predict the division of gains from cooperation, emphasizing fairness, bargaining power, and strategic behavior. Essentially, it helps understand how parties negotiate to maximize their outcomes while considering what they might receive if no agreement is reached.