Bargainers frequently fail to reach agreements that are Pareto optimal, even when such options exist. For example, parties bargaining over the price of a house may fail to reach an agreement even when the lowest price the seller will accept is less than the highest price the buyer will pay for the house. These inefficiencies in the negotiation outcomes can lead to an inefficient allocation of society's resources. For example, a manager may bargain with a supplier over the purchase price of a shipment of inputs. The strategy the manager adopts will be a function of the price she could receive from another supplier.
Cognitive psychology examines how individuals deviate from rationality in making decisions.
Economic theory describes how rational individuals should make decisions. We will examine the implications of these two approaches for negotiation. Whether or not individuals can form coalitions will be important in negotiations. In multi-party negotiations, the strategies employed and the outcome will depend on whether or not a subset of the bargainers can agree to negotiate jointly against the remaining bargainers. Negotiations are often conducted on behalf of others.