Bargaining
Why Studying Business Strategy? | Business Strategies | Bargaining | Notes
What is Bargaining?
Hobbes refer the State to state of nature. There is a choice between a state of nature in which a was of all againsts all and a peaceful society where the peace is enforced vy a State which acts in the interest of all. Hobbes's state of nature clearly see the advantages of creating State. Hoever, there are issues to be resolved. The people must agree to the rights which the State will defend and share the common interest in peace. They still need to decide what rights are selected and how people resolve conflicts of interst. This is where bargaining problem arises.
The bargaining problem arises in any situation in which two or more agents are able to produce some benefit through cooperating with one another. If they fail to agree, they do not get the potential benefit and both lose. For instance, there is a gain to both a union and an employer from reaching an agreement on more flexible hours so that production can respond more quickly. The question is how the surplus is to be distributed between a union and an employer.
Suppose there is a hotel in a summer resort. The season lasts 101 days. Each day the hotel operates and it makes a profit of $1,000. At the beginning of the season, the employees' union confronts the management over wages. The union presents its demand. The management either accepts this, or reject it and returns the next day with a counteroffer. The hotel can open only after an agreement is reached.
First suppose bargaining has gone so long that the hotel can open for only the last day of the season. When it comes to the union's turn to present its demand, the management should accept anything becuase it is better than nothing. So the union gets the whole $1,000.
Now look at the day before the last, when it is the management's turn to make an offer, they know that the union can alwyas reject this. So they let the process go on to the last day, and get $1,000. Therefore the management cannot offer any less. Likewise, the union cannot do any better than get $1,000 on the last day, so the management does not need offer any more. Therefore, each side gets $500 a day. Now move back one more day. By the same logic, the union will offer the management $1,000 and ask for $2,000, which gives the union $667 per day and the management $333.
Each time the union makes offer, it has advantage, because they have ability to make the last all-or-nothing offer. The two sides' positions are identical: $505 versus $495. There were no alternating offfer, etc. When the time between offers is short and the bargaining horizon is long, split the total down the middle is the best choice. Since the two sides look ahead to predict the same outcome, there is no reason why they fail to agree and jointly lose $1,000 a day.
