Price-setting power and information asymmetry in sealed bidding

Diverging from the historical precedent of using a midpoint rule (k=½) to experimentally structure two-person bargaining under incomplete information, extreme values of k (k={0, 1}) are invoked in an asymmetric information environment endowing one player with exclusive price-setting power and the other player with veto-only power. Theoretical analysis suggests that regardless of who possesses an information advantage, expected profits for a seller (buyer) decrease (increase) in k. Yet, experimental results show that under conditions of dramatic information asymmetry, not only is the observed share of the surplus is much smaller than predicted for the player with price-setting power, but also the player with the information advantage is unable to garner a greater share of the surplus as has been consistently demonstrated in previous studies providing a boundary test of Daniel et al.'s Information Disparity Hypothesis (1998). Published in 2006 by John Wiley & Sons, Ltd.