Bargaining Hypothesis and the Surrender Paradox

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The bargaining hypothesis refers to an illogical and irrational agreement that may sometimes occur between a few mutually dependent parts, whose aim is to obtain more benefits in not favorable conditions. In other words, the stakeholders would prefer to leave their present condition in time of changes (for example, in the condition of war). The surrender paradox in the context of bargaining hypothesis predicts implementation of the game theory and division of political power between the privileged classes, who were able to acquire their rights. The paper focuses on the connection between the bargaining hypothesis and surrender paradox as a period of selected revenue before the age of sustainable development and democracy.

The Bargaining Hypothesis: General Issues

The concept of bargaining hypothesis is opposite to the well promoted but not always objectively maintained ideal competition among traders. This ideal competition is the absolute truth for many economists in their ideas about market and their approach to managing its policy. Bargaining is of a great interest to economists particularly because of the negotiated transactions in time when market forces do not determine them.

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The field of bargaining concern covers relations between two or more individuals who are interested in achieving agreement on any range of transactions. The stakeholders expect to make profit or at least to stay on the same level as they would in case of not reaching any agreement. The participants of bargaining relations are mutually dependent. Hence, they can define the general value of co-working results or the way to divide this value in co-operation or competition. Bargaining is a strategic cooperation directed towards achieving some aim, which is also considered as a mutually agreed behavior between the stakeholders. It means that different sides make a straight impact on the evaluation and estimation of each other, thus making a choice and response in turn. The bargaining hypothesis defines differences between the situations where participants act rationally and where the actions of stakeholders have no logic and rationality. However, the bargaining hypothesis has not received active maintenance in the daily practice of industrial companies. 

Concerning the trade model in the area of industrial marketing, it is sometimes possible to observe the specific case of competition trade. Here the price forms the key issue of the strategic constant. This kind of trade is special, because, except the price for a customer, some other issues can also be important. In some cases, the quality and rank of resources is much more important than the price. Considering the tendencies of procurement and its impact on relations between the customer and the trader, it is clear that indefinite execution of agreements may redirect the focus of attention from its price to delivery and reliability.

The basic pre-condition in the trade model is that the stakeholders can co-work for getting mutual benefit. However, this co-operation does not maximize the value of results for none of the sides. This precondition is essential for the majority of cases in industrial marketing. The trader and the customer can establish co-operation and erect the general value of agreement for both of them or they can refuse from co-operation and attempt to maximize the value by themselves. In theory, the co-operation between the trader and the customer may be characterized as the game of two persons with non-zero total sum.

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The modeling traders may predict the bargaining outcome and/or determine an agreement curve, which can find successful results of bargaining. It is possible with its indifference curves and initial endowments and during the adequate determination of competitive equilibrium in the market.

In his article, Alvin E. Roth mentioned two bargaining theory approaches suggested by John Nash, who, in 1950, created a model for outcome prediction “based only on information about each bargainer’s preferences, as modeled by an expected utility function over the set of feasible agreements and the outcome which would result in case of disagreement” (Roth n. p.). Later, in 1953, Nash improved his theory of strategic choices, which concerns stakeholders and bargainers. He made a deep analysis of the approach by defining the two models: complementary and strategy. He convinced about the strength of “one of the strategic equilibria of this game, which corresponded to the outcome identified in his 1950 paper” (Roth n. p.). The complementary model is rather directed on the outcomes and cooperative games. This approach develops the option of return to the market in case of non-satisfaction or disagreement, when the stakeholders meet and negotiate transactions.

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One of the key benefits of the classical models of bargaining was its support in resolution of disagreements. However, those disagreements are, in fact, results of bargainers’ mistakes. The model of not-completed information makes it possible to remedy this, specifically through the demonstration of positive probability of disagreement and its unavoidable equilibrium. It means that one part of stakeholders have no definite idea of how the other part values and estimates all transactions. There is also underlying intuition in cases when both sides reach an agreement, and there is obvious profit from trade, where the trader does not get a high benefit on every agreement (as he could).

Many game theoretic models of bargaining are very hard to observe, and, according to Alvin E. Roth, “These models were long resistant to all but the most indirect empirical tests” (n. p.). The growth of experimental economics brought an opportunity to make hard attempts to predict those theories, specifically through innovative laboratory experiments. Although several qualitative predictions have been maintained, those attempts – new existing models – do not have enough competency regarding the background mechanism to be well-designed predictors.

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Recently, the theorists of economics have expressed innovative interest in various theories, which have a direct relation to adaptive behavior. Their field of interest covered strong coordination and/or learning of those renewed theories as well. Hence, the relation of the bargaining approach to political circumstances is interesting to observe in the aspect of surrender paradox.

The Surrender Paradox in the Context of Bargaining Hypothesis

To explain the connection between the bargaining theory and surrender paradox, it is necessary to describe the strategic situation, which has been repeatedly created after the civil war. It is necessary to imagine the players (because the issue regards the game theory) and predict the equilibrium result of their strategic cooperation. The equilibrium in the game gets its definition as a self-enforcing strategy profile, so that a stakeholder cannot choose another strategy. Agreeing with Leonard Wantchekon, who mentioned, “The key players of the game are two warring factions and the citizenry,” the political domination leads to applying to the tradition of conflicts and violent resolution (5). With the purpose to maintain military actions and use economic benefits of political control, the key players practice expropriation and extortion of people’s wealth. It is possible to agree with Victor Magagna, who in his first lection made connection between bargaining and surrender paradox, specifically through “stability, instability and mass demand for democracy” because of warring (n. p.). In this case, it would be a good option to develop the issue of poor-class conditions and its consequences on the formation of the elite class economy. Definitely, the leading European countries such as England, Germany, and France have passed through all challenges and democracy threats, and the innovative approach to bargaining process allowed them to make a better balance between assets and taxes decades after the war.

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Continuing the issue about warring, the conflicting parts “might enjoy political supremacy for its own sake” (Wantchekon 6). However, any supremacy brings large economic benefits, specifically through the expropriation of wealth and resources, which are results of the citizens’ work. On the other hand, the dominants can control the extraction of natural resources and raw materials in the locations of their supremacy. Hence, the basis of war contains the motivation through getting power, while citizens are concerned only about their security. There are three groups of citizenry: politically active part (supporters and activists), non-partial/non-affiliated, and those who are affiliated with any of the two mentioned groups. The affiliated group is beneficial, because they can use all benefits of their investments. Simultaneously, non-affiliated representatives have no protection or benefits of such kind, so the lords/owners can expropriate their goods. The two warring groups have participated in expensive and utopian domination over the government. 

The conflict reached the point of stalemate with no winners even in theory. The majority of citizens migrated from the country, therefore moving labor and intellectual skills out. Some part of citizens hide their assets because of the uncontrolled and anarchical expropriation they face from the warring parts and their members. This situation has led to signification of the peaceful agreement and managing new conditions for the government and forming a new government. Consequently, the result of a long-tern agreement between the warring parties causes bargaining relations over “future spoils of office,” but it is rather utopian (Wantchekon 6). As a result, the conflict stakeholders apply for the independent third party to execute the role of an arbiter in the process of forming a new government. The role of an arbiter can belong to one player, such as a foreign country (that is agreed by both sides as the one who is trustworthy) or a military leader. In this context, it is logical to agree with Victor Magagna’s second lecture definition of the “supreme war leader (leader of the military aristocracy and freemen)” (n. p.). The military leader’s containment erects its organizational subordination of forces, which outsides political control. As a result, it empowers bargaining relations between states and its all subjects. In return for some important contributions in peoples’ wealth, the society became obligated to provide protective institutions and create social welfare programs as a basis of the state’s war-making efforts.

There is obvious dependence between the economy of the supreme class on tax revenues “and taxpayer requirement for political representation” (Wantchekon 8). There is a widely spread opinion that leaders increase revenues through the encouragement of joint ventures with their present taxpayers. Thus, leaders give voting rights to beneficial/useful citizens as a method for commitment to joint venture. In turn, these citizens use their voting right for protection and promotion of their investments and assets. Simply, this is one of the key issues implementing the bargaining hypothesis: citizens leave a part of their wealth for leaders/governors as a condition for vital agreement. In his third lecture, Victor Magagna speaks about “legal protections (rights) for aristocrats and all freemen” as a key benefit (n. p.). This agreement allows exchanging their wealth for political rights, which guarantee legal protection of their property. There are more bargaining opportunities for taxpayers in case of higher mobility of their assets. It is interesting that the other institutions, which make an impact on political and public opinion and that are unconditionally involved in the process of political decision-making, are such formally non-commercial establishments as a church. However, in his second lecture, Victor Magagna adds more structures except business elites: “The aristocracy and gentry; the church; towns and cities; villages” (n. p.). Consequently, the participating institutional stakeholders provide mutual concessions.

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In conclusion, the bargaining hypothesis is interesting by its nature as an indicator for defining logic and motivation of stakeholders, and acting in some circumstances for getting benefits. The agreement between two or more players (because, in fact, the issue involves the game theory) aims at achieving a compromise through financial, political, legal, and social issues. In the European tradition, it was a well-known tendency before the innovative approach of sustainable development and democracy stabilization came. Hence, the bargaining hypothesis gives a proper example and motivation for removing conflicting and warring approach to leading, which, with time, has changed by mutual concessions.