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Incomplete Information Bargaining with Outside Opportunities

Drew Fudenberg¹; David K. Levine²; Jean Tirole³

¹ University of California, Berkeley · ² University of California, Los Angeles · ³ Massachusetts Institute of Technology

We consider two kinds of “outside opportunity” that a seller of an indivisible good might have: selling to a different buyer and consuming the good herself. In both models the seller is uncertain about the buyer's valuation, and becomes more pessimistic over time. When the seller becomes sufficiently pessimistic, she prefers the outside opportunity, so she will not bargain indefinitely with the current buyer. Despite the resulting finite-horizon nature of negotiations, the link between the buyer's willingness to accept an offer and the seller's eagerness to go “outside” generates multiple equilibria.

DOI

10.2307/1884679

Volume

102 (1)

Pages

37

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