Hypothetical Bargaining and the Equilibrium Selection Problem in Non-Cooperative Games

Mantas Radzvilas

MPRA Paper from University Library of Munich, Germany

Abstract: Orthodox game theory is often criticized for its inability to single out intuitively compelling Nash equilibria in non-cooperative games. The theory of virtual bargaining, developed by Misyak and Chater (2014) suggests that players resolve non-cooperative games by making their strategy choices on the basis of what they would agree to play if they could openly bargain. The proposed formal model of bargaining, however, has limited applicability in non-cooperative games due to its reliance on the existence of a unique non-agreement point – a condition that is not satisfied by games with multiple Nash equilibria. In this paper, I propose a model of ordinal hypothetical bargaining, called the Benefit-Equilibration Reasoning, which does not rely on the existence of a unique reference point, and offers a solution to the equilibrium selection problem in a broad class of non-cooperative games. I provide a formal characterization of the solution, and discuss the theoretical predictions of the suggested model in several experimentally relevant games.

Keywords: Nash equilibrium; bargaining; equilibrium selection problem; Nash bargaining solution; correlated equilibrium; virtual bargaining; best-response reasoning (search for similar items in EconPapers)
JEL-codes: C70 C71 C72 C78 (search for similar items in EconPapers)
Date: 2016-03-24
New Economics Papers: this item is included in nep-gth, nep-hpe and nep-mic
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