A Bargaining Model for Predicting Price Adjustments to Technological Change

The application of economic theory to problems of price-quantity adjustments in bargaining situations has been limited by the importance of variables which are not subject to quantification. This paper shows how some of these behavioral variables can be incorporated into an economic model to increase the predictability of the equilibrium adjustments between two segments of an industry. In this article, experimental work done by Siegel and Fouraker on individual behavior under bargaining conditions is incorporated into an economic model based on theoretical propositions developed by Edgeworth, Fellner, and others. The absolute limits of the bargaining range are established by the minimum profits acceptable to the firms engaged in negotiation. The equilibrium position within this range is determined by the distribution of bargaining power. The model is illustrated with the Michigan asparagus industry, in which a technological change in harvesting resulted in substantial shifts in the distribution of profits. The bargaining negotiations between producers and processors established a series of new prices for the raw product. On the basis of the analytical model, the outcome of the adjustment is hypothesized to be within a relatively narrow range of prices. This hypothesis is tested against the empirical evidence of actual adjustments in the industry and implications for further group action by producers are presented.