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RE: efficient breach (c(p)-line and optimal i*)

by Kirstein on 01 Feb. 2010 19:43 Okay, let‘s have a look at the second question. The line c(p)simply states all the c-p-combinations that maximize the Nash-Product. There is no unique solution to the bargaining problem (that would be one single combination of c and p), but a whole set of combinations - which is well structured, of course. The positive slope of this line says that an increase of the price p has to be compensated by a higher contractual penalty c (and the factor is 3): for both parties it is immaterial whether the rent is shared via the initial price p, or the contractual penalty c. The latter is only due in 1/3 of the cases, which explains the factor 3. The intercept of the c(p)-line (-210) can be interpreted as the contractual penalty that has to be promised to B if the parties agree upon an initial sales price of zero. If the initial sales price is positive, the penalty c needs to be higher so as to share the contract rent evenly (that‘s the defining feature of the Symmetric Nash Bargainign Solution). More clear now? Best, RK Web search, Forum search for efficient breach c p line opti ...