Bargaining Costs and Rational Behavior

This article presents a discussion of the effects of bargaining costs on the behavior of rational bargainers. Rationality is defined so as to reflect the bargainers' recognition of cooperative as well as conflictual aspects of bargaining. Bargaining is viewed as a sequential non-zero-sum game, which allows the bargainers to communicate through exchanges of their demands. It is shown that if the communication process were entirely costless, no need for communication would arise. The presence of bargaining costs makes each bargainer's behavior vulnerable to his opponent's actions, and thus opens the way for bargaining. As a result, a rational bargainer may make demands deviating from his expectations of the final terms of agreement. Rational behavior becomes, in a sense, unpredictable and may not suffice to reach an agreement. Some implications of the analysis are discussed.