Bilateral Bargaining with Externalities

Catherine C. Fontenay and Joshua Gans

Journal of Industrial Economics, 2014, vol. 62, issue 4, 756-788

Abstract: type="main">

This paper provides an analysis of a non-cooperative pairwise bargaining game between agents in a network. We establish that there exists an equilibrium that generates a coalitional bargaining division of the reduced surplus that arises as a result of externalities between agents. That is, we provide a non-cooperative justification for a cooperative division of a non-cooperative surplus. The resulting division is related to the Myerson-Shapley value with properties that are particularly useful and tractable in applications. We demonstrate this by examining buyer-seller networks and vertical foreclosure.

Date: 2014
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