ABSTRACT
This chapter begins by setting up a general framework within which bargaining will take place. It discusses how the gains from trade are divided between the parties. The party with more bargaining power will receive a greater share of the benefits. The chapter examines that bargaining may break down in the presence of asymmetric information, meaning that gains from trade may not be realized. The parties bargain with each other in order to determine the price of the good and hence the amount of surplus that each party receives; in other words, bargaining helps determine how the gains from trade are split. Bargaining power tends to arise from some economic characteristic or the nature of the bargaining process. This means that a party to a negotiation process, such as a business or a union, might want to manipulate how the negotiations occur in order to get more of the gains from trade.
