Bargaining

Table of Contents

1. Frontmatter

2. Chapter 1. Introduction

   Emin Karagözoğlu, Kyle B. Hyndman

   Abstract

   It goes almost without saying that bargaining is ubiquitous and has been a part of the human experience for thousands of years. It is arguably one of the most natural forms of social interaction. As Schelling (1960) famously put it, “most conflict situations are bargaining situations.” Hence, it is not surprising to see that a great deal of attention has been paid to it in terms of academic research in multiple disciplines. We, the editors of this book, are thrilled to see that even after decades of research on bargaining, it is still a dynamic and evolving field, and we hope that the readers of this book will share our enthusiasm.

3. Theoretical and Behavioral Foundations

   1. Frontmatter

   2. Chapter 2. Commitment Tactics in Bargaining Under Complete Information

      Topi Miettinen

      Abstract

      In this chapter, I will focus on the complete information non-cooperative literature on commitment in this millennium. I define pre-commitment as an explicit choice to restrict one’s future action space. I will thus not consider the endogenous commitment literature where commitment arises as a by-product of past actions. I will also not address reputational bargaining nor dynamic incomplete information bargaining. The key finding is that costly strategic pre-commitments which are uncertain to succeed may unavoidably lead to inefficiency—a finding challenging the received wisdom that complete information bilateral bargaining is necessarily efficient. These models thus suggest an alternative to incomplete information in explaining the empirically observed delay and inefficiency in bargaining and conflict. I summarize the theoretical developments, I discuss the applied future directions, the empirical evidence, and the limitations of the approach

   3. Chapter 3. Reputational Bargaining

      Jack Fanning, Alexander Wolitzky

      Abstract

       We survey the literature on reputation-building in bargaining games. Topics include classical results of Myerson, Abreu, and Gul; extensions to more complex environments and forms of incomplete information; applications to search markets and mediation; and experimental evidence.

   4. Chapter 4. Dynamic Bargaining with Private Information

      William Fuchs, Andrzej Skrzypacz

      Abstract

      We discuss a few recent theoretical papers studying the dynamics of negotiations. Our focus is on recent papers that describe bargaining “outside the void.” That is papers that model negotiations between two parties that are influenced by the outside environment: for example, by the possibility of entry of new trading parties, the existence of a deadline, the possibility of arrival of information, or new outside options materializing.

   5. Chapter 5. Reference Dependence in Bargaining Models

      Kerim Keskin

      Abstract

      It is often observed in real-life bargaining encounters and in bargaining experiments that individuals might reach a belated agreement (i.e., delay) or leave the table completely empty-handed (i.e., disagreement) (see Roth et al. 1988; Babcock et al. 1995; Gächter and Riedl 2005; Karagözoğlu and Keskin 2015; among others). Since the classical bargaining models provide little help in explaining such observed behavior, one can utilize the models of behavioral economics in order to have a better understanding of the qualitative aspects of the observed bargaining outcomes. Furthermore, since most behavioral models have additional degrees of freedom (compared to the models with standard preferences), they might be of help in explaining the quantitative aspects of the observed outcomes as well. The latter would be important especially when the distributional properties (e.g., equal and/or fair division) of the bargaining outcome are of concern. One of the behavioral models used in bargaining theory is reference dependence. This chapter surveys the literature on reference dependence in bargaining models, with a particular focus on theoretical contributions in both cooperative and non-cooperative bargaining theory.

   6. Chapter 6. Focal Points in Experimental Bargaining Games

      Andrea Isoni, Robert Sugden, Jiwei Zheng

      Abstract

      The experimental literature on bargaining games is vast and growing. The common thread is the investigation of games in which bargainers reach an agreement that results in some allocation of resources between them. Unlike real-world bargaining, in which negotiations are often multi-dimensional and therefore rather complex, in most experiments outcomes are defined in terms of monetary payoffs to the bargainers, providing participants with real incentives to pursue their interests in a way that is intelligible to researchers. Beyond the major and subtle differences between specific bargaining protocols, most experimental bargaining games have in common the most distinctive feature of bargaining: the multiplicity of alternative agreements (including the possibility of disagreement). The bargainers typically have conflicting preferences over alternative agreements, but a common interest in avoiding costly disagreement. This multiplicity of conflicting alternatives will be the focus of this chapter.

   7. Chapter 7. Between Utilitarianism and Egalitarianism: Some Ethical Aspects of the Nash Bargaining Solution

      Shiran Rachmilevitch

      Abstract

      IThe chapter discusses the connections between the Nash bargaining solution on the one hand, and utilitarianism and egalitarianism on the other. In particular, it is shown how the Nash solution oers a compromise between the two opposing schools of thought, and how it overcomes diculties from which utilitarianism and egalitarianism user.

   8. Chapter 8. Dynamic Legislative Bargaining

      Hülya Eraslan, Kirill S. Evdokimov, Jan Zápal

      Abstract

      This article surveys the theoretical literature on legislative bargaining with endogenous status-quo. These are the legislative bargaining situations in which in each period a new policy is decided and the policy implemented in the event of no agreement is endogenously determined by the outcome of bargaining in the previous period. After describing a general framework, we discuss bargaining over redistributive policies, bargaining over spatial policies, existence issues, efficiency issues, and open questions.

4. Applications

   1. Frontmatter

   2. Chapter 9. Legislative Bargaining Experiments

      Marina Agranov

      Abstract

      The chapter discusses the connections between the Nash bargaining solution on the one hand, and utilitarianism and egalitarianism on the other. In particular, it is shown how the Nash solution offers a compromise between the two opposing schools of thought, and how it overcomes difficulties from which utilitarianism and egalitarianism suffer.

   3. Chapter 10. Market Institutions, Prices and Distribution of Surplus: A Theoretical and Experimental Investigation

      Nick Feltovich, Nejat Anbarcı

      Abstract

      In this chapter, we examine three market institutions using theory and experiment. Under “posting”, sellers post non-negotiable prices, seen by buyers who then choose whom to visit.Under “haggling”, prices are not posted, but emerge via bilateral negotiation or bidding. Under “flexible pricing”, prices are posted but are flexible upwards or downwards (as under haggling). Observed market performance differs from standard-theory predictions in systematic ways. These differences may be due in part to deviations in the bargaining and auction stages. Bargaining under both haggling and flexible pricing favours the seller compared to standard bargaining solutions, while auction results favour the seller, but less than implied by the theory. Disagreements occur about 10% of the time in bargaining and about 3% in auctions.

   4. Chapter 11. Empirical Models of Bargaining with Externalities in IO and Trade

      Ali Yürükoğlu

      Abstract

      This chapter provides an overview of empirical models of situations where a small number of agents interact with each other in pairwise negotiations.

   5. Chapter 12. Bargaining in Healthcare Markets: Applications of Nash-in-Nash and Extensions

      Matthew Grennan, Ashley Swanson

      Abstract

      Many prices in healthcare markets are determined by business-to-business negotiations among healthcare providers, producers, and payers. Combined with the rich data that has become available to healthcare researchers, this has led to a growing body of empirical research on bargaining in healthcare markets, particularly in the development of structural models of bargaining that researchers can estimate from data and use to consider counterfactual policies. In this chapter, we review these models and their importance for healthcare and bargaining research more broadly.

   6. Chapter 13. Bargaining and Climate Change Negotiations

      Alejandro Caparrós

      Abstract

      This chapter discusses the use of bargaining theory to analyze climate change negotiations. These negotiations have moved away from what was basically a burden-sharing agreement, the Kyoto Protocol, to a pledge and review process, the Paris Agreement. After highlighting that most available analyses are adequate to model the former, but not the latter, recent efforts to overcome this difficulty are discussed. Acknowledging this limitation, issues discussed include the role of a leader; the impact of key features of international negotiations, such as delegation and ratification; whether countries are likely to form groups during the negotiation process; the role of information asymmetries; and the influence of the expectation of a future bargaining process on investment decisions.

   7. Chapter 14. Bargaining and War

      Bahar Leventoğlu

      Abstract

      War destroys the resources of all engaged parties. Therefore, the surplus parties can divide after war is always smaller than the surplus they could divide before war. Then why do rational actors not agree to a negotiated settlement they would all prefer to the war outcome? This question constitutes the central puzzle in the rationalist paradigm on war. This puzzle manifests itself in bargaining models of war as in Fearon’s (1995) pioneering work “Rationalist Explanations for War.”

   8. Chapter 15. Bargaining in Operations Management Research

      Andrew M. Davis

      Abstract

      Operations management investigates how companies can take inputs, convert them into end products and services, and deliver them to customers in a way that maximizes profits. As globalization increases it is becoming increasingly difficult for a company to accomplish such a task by itself. Instead, companies must rely on working with others in complex supply chains to take raw materials and generate a final product for customers. As one might imagine, an innumerable number of these business-to-business interactions occur every day and involve bargaining, which is where operations management research has recently turned its attention.

5. Advances in Bargaining Research: New Platforms, Challenges and Techniques

   1. Frontmatter

   2. Chapter 16. Field Experiments in Bargaining

      Burak Dindaroğlu, Seda Ertac

      Abstract

      Understanding price formation and surplus division in bargaining contexts has long been of interest to economists. Laboratory experiments contribute to our understanding of bargaining by inducing valuations and costs, which are usually unobserved in natural negotiation settings, and allow control over the negotiation process. Field experiments, on the other hand, allow economists to study bargaining in more natural contexts with higher external validity, and can be particularly useful when bargaining behavior draws on context-specific characteristics and experiences that may be stripped in lab settings or involves biases that would not surface under observability. In this chapter, we provide an overview of field experiments studying bargaining behavior and outcomes in a variety of settings, from bargaining for auto rickshaw to markets for livestock. We offer a methodological discussion, position field experiments in bargaining in the tradition of field experiments in economics at large, and highlight difficulties in the design and implementation of fieldwork for such environments. We also discuss potential areas and issues where future field experiments are of special importance for understanding price formation in bargaining.

   3. Chapter 17. Bargaining in Online Markets

      Matthew Backus, Thomas Blake, Steven Tadelis

      Abstract

      The significance of bargaining and negotiations in economic life has motivated a vast theoretical and experimental literature to the end of understanding how those who bargain find profitable deals, divide gains from trade, and avoid bargaining breakdown.

   4. Chapter 18. Self-sufficient, Self-directed, and Interdependent Negotiation Systems: A Roadmap Toward Autonomous Negotiation Agents

      Tim Baarslag, Michael Kaisers, Enrico H. Gerding, Catholijn M. Jonker, Jonathan Gratch

      Abstract

      Negotiation, the process of joint decision-making, is pervasive in our society (23). Whenever actors meet and influence each other to forge a mutually beneficial agreement, a form of negotiation is at work (44).

   5. Chapter 19. Using Machine Learning to Understand Bargaining Experiments

      Colin F. Camerer, Hung-Ni Chen, Po-Hsuan Lin, Gideon Nave, Alec Smith, Joseph Tao-yi Wang

      Abstract

      We study dynamic unstructured bargaining with deadlines and one-sided private information about the amount available to share (the “pie size”). “Unstructured” means that players can make or withdraw any offers and demands they want at any time. Such paradigms, while lifelike, have been displaced in experimental research by highly structured bargaining because they are hard to analyze. Machine learning comes to the rescue because the players’ unstructured bargaining behavior can be taken as “features” to predict outcomes. Machine learning approaches can accommodate a large number of features and guard against overfitting using test samples and methods such as penalized LASSO regression. In previous research, we found that the LASSO could add power to theoretical variables in predicting whether bargaining ended in disagreement. We replicate this work with higher stakes, subject experience, and special attention to gender differences, demonstrating the robustness of this approach.

   6. Chapter 20. Emotions in Bargaining

      Gert-Jan Lelieveld, Eric van Dijk

      Abstract

      The current chapter provides an overview of theory and research on the effects of emotions in bargaining. Three different ways in which emotions shape negotiations will be discussed. The first part focuses on how the experience of one's own emotions influences the bargaining process (i.e., the intrapersonal effects). The second part reviews how emotional expressions influence the other party in negotiations (i.e., the interpersonal effects). The last part will focus on how emotions influence deceptive strategies in negotiations, and how negotiators use their emotions to deceive their opponents. Finally, suggestions for future research and practical implications are discussed.

   7. Chapter 21. Gender Differences in Negotiation and Policy for Equalizing Outcomes

      María P. Recalde, Lise Vesterlund

      Abstract

      Men more than women succeed when negotiating over labor-market outcomes, and gender differences in negotiation likely contribute to the gender wage gap and to horizontal and vertical segregation in the labor market. We review the evidence on the many initiatives that have been put in place to reduce the effect of gender differences in negotiation. Categorizing these as either “fix-the-women” or “fix-the-institutions” initiatives we find serious challenges to the former. Women do not appear to be broken and encouraging them to negotiate more and differently often backfires. The evidence suggests that “fix-the-institution” initiatives are more effective in reducing gender differences in outcomes. Concerns of adverse effects of banning negotiations or salary history requests have not materialized, and preliminary evidence points to reductions in the gender differences in negotiation outcomes. The strongest evidence on effectiveness in narrowing gender disparities is found for policies that increase transparency. Numerous studies find that gender differences in negotiation diminish when it is clear what to expect from the negotiation and suggest that initiatives which improve transparency are likely to help equalize opportunities at the bargaining table.

6. Backmatter