Bargaining Costs and Failures in the Sealed-Bid Double Auction

Abstract

This paper analyzes bilateral bargaining in the sealed-bid double auction with bargaining costs. There exists a multiplicity of equilibria to this game, all of which have unsatisfactory properties. Since anything seems possible, we focus on the completely mixed strategy equilibria (C.M.S.) but find that such equilibria require that the negotiator with the higher bargaining cost receive higher profits. Allowing the bargaining process to be dynamic does not entirely solve the problem because the offers in the dynamic game can demonstrate chaotic behavior. Moreover when failure costs are low there exist many infinite horizon C.M.S. equilibria. One feature of the C.M.S equilibrium is the existence of a significant probability of delay which is consistent with e1npirical reality. Finally if there is asymmetric information over bargaining costs, the negotiator with the higher bargaining costs obtains lower profits. Thus, asymmetric cost information leads to more plausible properties for most bargaining equilibria.