Bilateral Bargaining with Externalities

Abstract:     
This paper provides an analysis of a non-cooperative pairwise bargaining game between agents in a network. We establish that there exists an equilibrium that generates a coalitional bargaining division of the reduced surplus that arises as a result of externalities between agents. That is, we provide a non-cooperative justification for a cooperative division of a non-cooperative surplus. The resulting division is akin to the Myerson-Shapley value with properties that are particularly useful and tractable in applications. We demonstrate this by examining buyer-seller networks and vertical foreclosure.

Number of Pages in PDF File: 42

Keywords: bargaining, Shapley value, Myerson value, networks, games in partition function form

JEL Classification: C78

working papers series