Reservation Price

A reservation price is a private valuation, not disclosed to other agents. This secrecy is fundamental to strategic negotiation. In protocols like the Monotonic Concession Protocol, agents infer others' reservation points through the pattern of offers, but direct revelation is typically non-optimal. This creates an information asymmetry that the negotiation mechanism must handle.

The reservation price defines the indifference point between an agreement and no agreement (the Best Alternative to a Negotiated Agreement - BATNA). For a seller, any price below this is worse than walking away. For a buyer, any price above is unacceptable. It is the hard constraint in an agent's utility function, making agreement impossible beyond this point.

The overlap between the buyer's maximum willingness to pay and the seller's minimum willingness to accept defines the Zone of Possible Agreement (ZOPA). If the buyer's reservation price is >= the seller's, a ZOPA exists. The final price will fall within this zone. If not, the negotiation is doomed to fail unless other issues are introduced via Multi-Issue Negotiation to create value.

In Auction-Based Negotiation protocols like Vickrey auctions, an agent's reservation price is its true private value, which forms the optimal bid. In Game-Theoretic Protocols like the Rubinstein Bargaining Model, the reservation price, combined with time discounting, determines the equilibrium offer sequence. An agent's strategy is a function of its own reservation price and its beliefs about others'.

The aspiration price is a more optimistic target, representing what an agent hopes to achieve, while the reservation price is the fallback. A skilled negotiation strategy involves anchoring offers near the aspiration price while conceding toward, but never beyond, the reservation price. This creates a concession schedule that protects the agent's critical walk-away point.

In Mechanism Design, the goal is to create protocols where revealing one's true reservation price is a dominant strategy. The Vickrey Auction is a canonical example of a Strategy-Proof Mechanism where bidding one's true value is optimal. The Revelation Principle states that any mechanism's outcome can be replicated by a direct mechanism where agents truthfully report their types (including reservation prices).