CFDP 550

An Extension of the Nash Bargaining Problem: Introducing Time-Related Bargaining Costs


Publication Date: April 1980

Revision Date: February 1981

Pages: 12


The Nash Bargaining is reformulated by introducing time-related costs into the von Neumann-Morgenstern utility functions of the parties. A set of mathematical requirements on the solution is satisfied uniquely by a function called the Extended Raiffa Solution. The properties of this function are investigated. It is shown to coincide with the Nash Cooperative Solution (of a related Bargaining Problem) when the parties have identical discount rates. An interpretation of the solution and of the formal requirements is detailed. In this model the ‘bargaining power’ of the parties is determined by the bargaining costs related to the duration of the negotiations.