Payoff Uncertainty, Bargaining Power, and the Strategic Sequencing of Bilateral Negotiations

32 Pages Posted: 3 Aug 2011

See all articles by Silvana Krasteva

Silvana Krasteva

Texas A&M University

Huseyin Yildirim

Duke University - Department of Economics

Date Written: July 20, 2011

Abstract

This paper investigates the sequencing choice of a buyer who negotiates with the sellers of two complementary objects with uncertain payoffs. We show that the sequencing matters to the buyer only when equilibrium trade can be inefficient. In this case, the buyer begins with the less powerful seller if the sellers have sufficiently diverse bargaining powers. If, however, both sellers are strong bargainers, then the buyer begins with the stronger of the two. For either choice, the buyer’s sequencing (weakly) increases the social surplus. Our analysis further reveals that it is sometimes optimal for the buyer to raise her own cost of acquisition to better manage the supplier competition. As such, we find that the buyer may commit to paying the sellers a minimum price strictly above the marginal cost; and that the buyer may outsource an input even though it can be made in-house. Finally, we identify the first - and second - mover advantages in negotiations for the sellers.

Keywords: negotiation, sequencing, bargaining power, coordination

JEL Classification: C70, L23

Suggested Citation

Krasteva, Silvana Simeonova and Yildirim, Huseyin, Payoff Uncertainty, Bargaining Power, and the Strategic Sequencing of Bilateral Negotiations (July 20, 2011). Economic Research Initiatives at Duke (ERID) Working Paper No. 108. Available at SSRN: https://ssrn.com/abstract=1904401

Silvana Simeonova Krasteva

Texas A&M University ( email )

Langford Building A
798 Ross St.
College Station, TX 77843-3137
United States
(979) 845-7384 (Phone)

HOME PAGE: http://econweb.tamu.edu/skrasteva/

Huseyin Yildirim (Contact Author)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
919-660-1805 (Phone)
919-684-8974 (Fax)

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