Markets with Bilateral Bargaining and Incomplete Information

Kalyan Chatterjee and Bhaskar Dutta

in Emerging Issues in Economic Development

Published in print June 2014 | ISBN: 9780198099062
Published online January 2015 | e-ISBN: 9780199084982 | DOI:
Markets with Bilateral Bargaining and Incomplete Information

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The chapter studies the relationship between bargaining and competition with incomplete information. It considers a model with two uninformed and identical buyers and two sellers. One of the sellers has a privately-known reservation price, which can either be low or high. The other seller’s reservation price is commonly known to be in between the low and high values of the privately-informed seller. Buyers move in sequence, and make offers with the second buyer observing the offer made by the first buyer. The sellers respond simultaneously. The chapter shows that there are two types of (perfect Bayes) equilibria. In one equilibrium, the buyer who moves second does better. In the second equilibrium, buyers expected payoffs are equalized, and the price received by the seller with the known reservation value is determined entirely by the equilibrium of the two-player game between a single buyer and an informed seller. The chapter also discusses extensions of the model to multiple buyers and sellers, and to the case where both sellers are privately informed.

Keywords: bilateral bargaining; incomplete information; perfect Bayes equilibrium; reservation price

Chapter.  10228 words. 

Subjects: Economic Development and Growth

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