Bargaining

Contracting is a part of everyday economic life. 

Firms and their employees

Doctors and patients

Parents and children

Any contractual relationship has two phases

A contracting or negotiating phase in which the players set the terms of the contract

An implementation phase during which the contract is carried out and enforced

Negotiated contracts involve the trade of goods, services and/or money.  Trade can create value.  Avery has a pizza and Bart has a TV.  If they only consume what they have then Avery doesn't get to watch the World Series and Bart goes hungry.  If Bart sells some TV time to Avery for half the pizza then they may both be better off.

As we saw in the story of Tommy, Penny and Nicky at the start of the semester, creating value is one thing and dividing value is another.