Bilateral Bargaining with Externalities

33 Pages Posted: 24 Dec 2014

See all articles by Catherine de Fontenay

Catherine de Fontenay

University of Melbourne - Melbourne Business School

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

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Date Written: December 2014


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 related 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.

Suggested Citation

de Fontenay, Catherine C. and Gans, Joshua S., Bilateral Bargaining with Externalities (December 2014). The Journal of Industrial Economics, Vol. 62, Issue 4, pp. 756-788, 2014. Available at SSRN: or

Catherine C. De Fontenay (Contact Author)

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186

Joshua S. Gans

University of Toronto - Rotman School of Management ( email )



NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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