9781118041581

The Economic Sources of Beneficial Agreements 633

comes along the payoff frontier are efficient. For instance, consider an agree-

ment at a $520,000 price. Any change in price that makes one party better off

necessarily makes the other worse off; that is, there is no other agreement that

is better for both parties. Thus, this agreement is efficient.

This example, simple as it is, illustrates the mixture of cooperative and

competitive elements in bargaining. The parties must cooperate to reach some

mutually beneficial agreement. But, of course, the price at which an agreement

FIGURE 15.1

The Zone of

Agreement and the

Payoff Frontier

520 540 560 580 600

(a) Zone of Agreement

ABC

Seller’s

profit

Buyer’s

profit

⎩⎪⎨⎪⎧ ⎩⎪⎪⎪⎪⎪⎪⎪⎨⎪⎪⎪⎪⎪⎪⎪⎧

P = $540

60

40

20

0 20 40 60 80

Seller’s Profit (in Thousands of Dollars)

80

A

P = $540

B

P = $560

C

P = $580

Buyer’s Profit (in Thousands of Dollars)

(b) Player Profits

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