This lecture explains why we can exploit game theory to increase our understanding of bargaining.
- The standard way people learn bargaining—through anecdotes—makes it difficult to understand the sources of bargaining power.
- It is even more difficult to make strong conclusions when there multiple issues potentially affecting bargaining. For example, perhaps a person succeeded in bargaining when they employed x, y, and z. But maybe x did all of the heavy lifting, y did nothing, and z hurt. Then, despite the good outcome, the individual could have performed even better.
- Game theory was developed in the 1950s to study situations that involve strategic interdependence—that is, any circumstance where what I want to depends on what you will do, and what you want to do depends on what I will do.
- Game theory allows us to study such strategic scenarios in a vacuum. We can check whether x truly provides bargaining power by solving models with and without x and then seeing how the results differ.