Is Bargaining Over Prices Efficient?

36 Pages Posted: 2 Dec 2002

See all articles by Julio Davila

Julio Davila

Nazarbayev University; Center of National Scientific Research

Jan Eeckhout

University College London - Department of Economics

Date Written: October 2002

Abstract

We consider the problem of two agents bargaining over the relative price of two goods they are endowed with. They alternatingly exchange price offers and the utilities are discounted. The recipient of an offer can either accept it and choose the quantities to be traded, or reject and counteroffer a different relative price. We study the set of equilibria as discounting frictions vanish and find that: (1) any generic economy has bargaining equilibria that are inefficient even as discounting frictions vanish; and (2) a bargaining equilibrium converging to a Walrasian outcome exists for some robust types of convergence of the discount factors, but it does not exist for other equally robust convergences. Moreover, in case there exists a bargaining equilibrium converging to a Walrasian outcome, then there is necessarily a multiplicity of them. As a consequence, unlike in Rubinstein's (1982) alternating-offer bargaining, the equilibrium outcome of this set-up is not generically unique and efficient.

JEL Classification: C78

Suggested Citation

Davila, Julio and Eeckhout, Jan, Is Bargaining Over Prices Efficient? (October 2002). Available at SSRN: https://ssrn.com/abstract=356960 or http://dx.doi.org/10.2139/ssrn.356960

Julio Davila (Contact Author)

Nazarbayev University ( email )

53 Kabanbay Batyra Avenue
Astana, 010000
Kazakhstan

Center of National Scientific Research

3, rue Michel-Ange
106-112 Boulevard de l'Hopital
Paris cedex 16, 75794
France

Jan Eeckhout

University College London - Department of Economics ( email )

30 Gordon Street
London WC1E 6BT, WC1H 0AX
United Kingdom