During his second term at Princeton, Nash writes his first paper, “The Bargaining Problem,” which later became a masterpiece of modern economic theory. Drawing on the classic economic notion of exchange, Nash takes a “completely novel” approach to a fundamental game theory problem: how will two rational bargainers interact, given that people do not always behave in purely competitive or individualistic ways, but often collaborate and cooperate? Nash’s theory shows that both sides expect each other to behave in a certain fashion, and that the bargain they ultimately decide on depends on a combination of two factors: “the negotiators’ back-up alternatives and the potential benefits of striking a deal.”
Nash’s “bargaining problem” analyzes negotiations between two players deciding on a bargain, helping to describe the ways in which these players will interact based on the joint payoff possible.
Later, Nash would maintain that he first developed his interest in the bargaining problem while taking a course on international trade at Carnegie Tech—the only economics course he ever attended—and that he was encouraged to further explore this idea by the presence of the game theory group (von Neumann and Morgenstern) at Princeton. His initial exposure to economics, it seems, was most influential in his development of the bargaining theorem.
Nash helped to transform economics into a field interested in explaining not only individual choices but also group dynamics—though he himself often struggled in group settings.