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Bargaining with Search as an Outside Option: The Impact of the Buyer's Future Availability

Author

Listed:
  • Manel Baucells

    (IESE Business School, University of Navarra, Avenue Pearson, 21, 08034 Barcelona, Spain)

  • Steven A. Lippman

    (The Anderson School, University of California, Los Angeles, California 90094)

Abstract

This paper seeks prescriptive advice for a seller whose outside option is to sell an asset via search, while facing a potential buyer whose outside option is to walk away. In the basic model, the buyer and seller efficiently split the gains from agreement, and the future availability of the buyer is irrelevant. We compare the buyer's threat of committing to never buy the asset versus the threat of delaying the agreement until the arrival of the next offer. Surprisingly, this restriction has no effect on the payoffs, even if the buyer's future availability is uncertain.In contrast, when informational frictions force the seller to use an actual offer rather than the expected return from search as an outside option, enormous changes in the dynamics and outcome ensue: Sale of the asset ceases to be instantaneous, and the seller might solicit several offers prior to sale. Both the payoffs and the probability that the sale is made to the buyer depend crucially on that buyer's future availability. Longer availability is beneficial to the seller and, contrary to intuition, need not be harmful to the buyer.

Suggested Citation

  • Manel Baucells & Steven A. Lippman, 2004. "Bargaining with Search as an Outside Option: The Impact of the Buyer's Future Availability," Decision Analysis, INFORMS, vol. 1(4), pages 235-249, December.
    • Handle: RePEc:inm:ordeca:v:1:y:2004:i:4:p:235-249
    DOI: 10.1287/deca.1040.0029
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    References listed on IDEAS

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    Cited by:

    1. Anita Gantner, 2007. "Bargaining, Search, and Outside Options," Working Papers 2007-16, Faculty of Economics and Statistics, Universität Innsbruck.

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