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Transparency of outside options in bargaining

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  • Hwang, Ilwoo
  • Li, Fei

Abstract

We study the effect of the transparency of outside options in bilateral bargaining. A seller posts prices to screen a buyer over time, and the buyer may receive an outside option at a random time. We consider two information regimes: one in which the arrival of the outside option is public and one in which the arrival is private. A public arrival of the outside option works as a commitment device that forces the buyer to opt out immediately. This effect leads to a generically unique equilibrium in which the Coase conjecture holds. In contrast, a private arrival of the outside option may lead to additional delay and equilibrium multiplicity. The Coase conjecture fails in some equilibria. The buyer's preference about transparency is time-inconsistent: she prefers to commit to making arrivals public, but she is unwilling to disclose her outside option after the arrival. Moreover, the seller benefits from having the buyer privately observe her outside option.

Suggested Citation

  • Hwang, Ilwoo & Li, Fei, 2017. "Transparency of outside options in bargaining," Journal of Economic Theory, Elsevier, vol. 167(C), pages 116-147.
    • Handle: RePEc:eee:jetheo:v:167:y:2017:i:c:p:116-147
    DOI: 10.1016/j.jet.2016.10.008
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    Cited by:

    1. Mehmet Ekmekci & Hanzhe Zhang, 2021. "Reputational Bargaining with Ultimatum Opportunities," Papers 2105.01581, arXiv.org.
    2. Uyanik, Metin & Yengin, Duygu, 2023. "Expropriation power in private dealings: Quota rule in collective sales," Games and Economic Behavior, Elsevier, vol. 141(C), pages 548-580.
    3. Yuxun Zhou & Mohammad Mafizur Rahman & Rasheda Khanam & Brad R. Taylor, 2023. "Alternative Method to Resolve the Principal–Principal Conflict—A New Perspective Based on Contract Theory and Negotiation," Mathematics, MDPI, vol. 11(2), pages 1-30, January.
    4. Hwang, Ilwoo, 2018. "A theory of bargaining deadlock," Games and Economic Behavior, Elsevier, vol. 109(C), pages 501-522.
    5. Chang, Dongkyu & Lee, Jong Jae, 2022. "Price skimming: Commitment and delay in bargaining with outside option," Journal of Economic Theory, Elsevier, vol. 205(C).
    6. Dongkyu Chang & Duk Gyoo Kim & Wooyoung Lim, 2022. "Positive and Negative Selection in Bargaining: An Experiment," CESifo Working Paper Series 9908, CESifo.
    7. S. Nageeb Ali & Navin Kartik & Andreas Kleiner, 2022. "Sequential Veto Bargaining with Incomplete Information," Papers 2202.02462, arXiv.org, revised Apr 2023.
    8. Chang, Dongkyu, 2021. "Optimal sales mechanism with outside options," Journal of Economic Theory, Elsevier, vol. 195(C).

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    More about this item

    Keywords

    Bargaining; Arriving outside option; Dynamic games; Coase conjecture; Transparency of outside options; Disclosure;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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