Bargaining and News
American Economic Review, Vol. 110 No. 2 February 2020
59 Pages Posted: 20 Apr 2016 Last revised: 30 Mar 2021
Date Written: August 26, 2019
We study a bargaining model in which a buyer makes frequent offers to a privately informed seller, while gradually learning about the seller’s type from “news.” We show that the buyer’s ability to leverage this information to extract more surplus from the seller is remarkably limited. In fact, the buyer gains nothing from the ability to negotiate a better price despite the fact that a negotiation must take place in equilibrium. During the negotiation, the buyer engages in a form of costly “experimentation” by making offers that are sure to earn her negative payoffs if accepted, but speed up learning and improve her continuation payoff if rejected. We investigate the effects of market power by comparing our results to a setting with competitive buyers. Both efficiency and the seller’s payoff can decrease by introducing competition among buyers.
Keywords: Bargaining, Private Information, Learning, Dynamics
JEL Classification: C78, C73, D83
Suggested Citation: Suggested Citation