Three is a crowd: A new cooperative solution concept for three-player games that takes parallel, bilateral negotiations to the center stage

Abstract

We propose and analyze a new solution concept, the R-solution, for three-person, cooperative games. In the spirit of the Nash Bargaining Solution, the solution is founded on the analysis of the parallel, two-party negotiations that would be the alterna- tive to the grand coalition. We compare the predictions of the R-solution with those of the Shapley value, and also show that the R-solution belongs to the Core whenever the latter is not empty. Finally, we discuss how the R-solution changes impor- tant conclusions of the Industrial Organization literature that deals with renegotiation in incomplete contracting frameworks.