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

Silvana Krasteva

Texas A&M University

Huseyin Yildirim

Duke University – Department of Economics

July 20, 2011

Economic Research Initiatives at Duke (ERID) Working Paper No. 108

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.

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

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