Econometrica: Mar, 1986, Volume 54, Issue 2

An Example of Price Formation in Bilateral Situations: A Bargaining Model with Incomplete Information

https://doi.org/0012-9682(198603)54:2<313:AEOPFI>2.0.CO;2-K
p. 313-322

Motty Perry

A seller and a buyer make offers and counteroffers to one another until they reach an agreement, or else one side decides to terminate the negotiations. Neither side knows the value of the other of reaching an agreement. It is shown,using the concept of sequential equilibrium, that if there are known fixed costs in bargaining, then the bargaining must terminate in a single round. The side with the lower costs of waiting makes an offer which the other side either accepts or rejects by terminating the bargaining.