Nash bargaining solution
The split of a bargaining surplus picked out by maximising the product of the two parties' gains over what they would get if talks broke down.
Often misread asReading it as a fifty fifty rule, and so missing that it splits evenly only when the parties are symmetric in both their fallbacks and their attitude to risk.
How to see it
Axioms in, one split out, and the fallback does the work
Rather than modelling the back and forth, you state a few properties any sensible split ought to have and see which split satisfies them all. Exactly one does: the one maximising the product of what each party gains over what they would have had if talks failed. All the content sits in that disagreement point.
The checkIt equalises gains measured from the disagreement point. Improve one side's fallback and their share rises, with nothing else about the bargaining having changed.
Try itTwo parties split a hundred pounds with both fallbacks at zero, and each gets fifty. Now give one party a fallback of forty and recompute. If your answer is still fifty each, you have not used the disagreement point.
Games that show it
Know these first
Leads on to
Easily confused with
Sources
- Nash, J. F. (1950). Econometrica 18(2), 155-162.
- Osborne, M. & Rubinstein, A. (1994). MIT Press.
- Myerson, R. (1991). Harvard University Press.