Multilateral Bargaining with Concession Costs
19 Pages Posted: 7 Dec 2004
Date Written: August 19, 2004
This paper presents a new non-cooperative approach to multilateral bargaining. We consider a demand game with the following additional ingredients: (i) There is an exogenous deadline, by which bargaining has to end; (ii) Prior to the deadline, players may sequentially change their demands as often as they like; (iii) Changing one's demand is costly, and this cost increases as the deadline gets closer. The game has a unique subgame perfect equilibrium prediction in which agreement is reached immediately and switching costs are avoided. Moreover, this equilibrium is invariant to the particular order and timing in which players make demands. This is important, as multilateral bargaining models are sometimes too sensitive to these particular details. In our context, players with higher concession costs obtain higher shares of the pie; their increased bargaining power stems from their ability to credibly commit to a demand earlier. We discuss how the setup and assumptions are a reasonable description for certain real bargaining situations.
Keywords: Bargaining, commitment, switching costs
JEL Classification: C72, C73, C78
Suggested Citation: Suggested Citation