Aggressive Bargaining leads to sub-optimal outcomes

Essay 2003 6 Pages

Business economics - Business Management, Corporate Governance




1. Introduction

2. Game Theory

3. International trade

4. Solutions

5. Sources


Figures 1: Different trade strategies with similar partner

Figures 2: Different trade strategies with different partner

1. Introduction

As the individual economies of the European Union member countries become increasingly integrated, sharing factors of production such as capital, labour, and technology, international trade is expected to continue to increase. For the purpose of this paper, I have chosen to analyse the international trade under the perspective of Aggressive Bargaining. The result will be that Aggressive Bargaining leads to a sub-optimal outcome.

2. Game Theory

Game Theory is the study of rational behaviour in situations involving independence (McMillen, 1992). Essential elements are players, actions, information, strategies, payoffs, outcomes and

equilibria. It is a formal way to analyze interaction among a group of rational agents who behave strategically[1]. It will be seen that at least some of the game theoretic instruments can be applied to the study of the different aspects of international trade.

3. International trade

International trade is the voluntary exchange of goods, services, assets, or money between two or more countries. Economists' studies of international trade preceded by many years the development of game theory. In respect of extent of this theme the essay focuses on the traditional Trade theories. In the seventeenth century the ideas of the Mercantilists predominated the thinking of economics. They understand trade as a zero sum game. Zero sum game means, that the benefit which one country gains from international trade means a corresponding detriment to another country.

If a country imported more than it exported, there was a net outflow of gold to other countries. This was seen as weakening national power, so that people were inclined to control international trade flows and arrange things so that there would preferably be a net inflow of gold from abroad.

This idea was criticised by British Smith and Ricardo. They stressed that trade is a positive sum game and that the Mercantilists were thus wrong. It is currently accepted that unrestricted trade benefits all the nation-states involved, since each of them can specialize in the production of the goods in which it has a comparative advantage over the others[2]. This leads to the conclusion that free trade should be the rule in international economic relations; however, this is not the case.

If one of two trading partners imposes a tariff, it will increase its benefits above the free trade level, an aggressive Bargaining strategy in the Game Theory terms. This reduces the benefits of the other trading partner, who, as a consequence, attempts to correct the imbalance by also imposing a tariff[3]. This will be shown in figures 1, where are two players (country A and B) with two different strategies (liberal, protection). The numbers in the matrix are the outcome of the game.


[1] In realty the players do not behave rational, a problem which will be discussed in the conclusion of this essay.

[2] See Figures I; strategy l

[3] See figures II; strategy p


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University College Cork
1,7 (A-)
Aggressive Bargaining Game Theory Stra Making



Title: Aggressive Bargaining leads to sub-optimal outcomes