Bargaining Power in Sequential Contracting

Abstract:     
Bargaining power affects the terms of trade negotiated between agents in the economy. When multiple players with interrelated payoffs negotiate contracts, the outcome of each negotiation depends on all the players' bargaining powers. In a model in which a buyer negotiates in sequence with two sellers, we find that the first seller's payoff is increasing in its own bargaining power and increasing in the second seller's bargaining power, while the second seller's payoff is decreasing in the first seller's bargaining power and, in some environments, also decreasing in its own bargaining power. We also find that when the sellers compete for the right to negotiate first, the buyer's payoff is increasing in its own bargaining power with respect to the efficient seller, but decreasing in its own bargaining power with respect to the inefficient seller. We characterize when contracts contain termination or breakup fees and when these fees are paid in equilibrium.

Number of Pages in PDF File: 38

Keywords: Rent Shifting, Noncomparative Bargaining, Sequential Negotiation

JEL Classification: C78, D48, L13

working papers series