Bilateral Bargaining with Externalities

Catherine C. de Fontenay, Dept. of Economics and Melbourne Busines
Joshua S. Gans, Melbourne Business School, University of Melbourne

Abstract

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 akin to the Myerson-Shapley value with properties that are particularly useful and tractable in applications. We demonstrate this by examining firm-worker negotiations and buyer-seller networks.