Bargaining with Search as an Outside Option: The Impact of the Buyer's Future Availability
by
Manel Baucells
IESE, Universidad de Navarra
Coauthors: Steven A. Lippman (UCLA)

We study the environment where, in negotiating the sale of an asset, the seller's outside option is to sell the asset via search and the buyer's outside option is to walk away. In the basic model, the buyer B and the seller S efficiently split the gains from agreement with respect to these outside options: the future availability of B is irrelevant.

When informational frictions force S to use an actual offer, rather than the expected return to search, as her outside option, enormous changes in the dynamics and outcome ensue: sale of the asset ceases to be instantaneous and S might solicit several offers prior to sale. Both the payoffs and the probability that the sale is made to B depend crucially on the future availability (to purchase the asset) of B. An increase in the length of time B will be available is beneficial to S, and, contrary to initial intuition, not necessarily harmful to B. We also compare B's disagreement threat of committing to never buy the asset vis-a-vis delaying the agreement until the arrival of the next offer. Surprisingly this restriction on the buyer's option has no effect on the payoffs, even if the buyer's future availability is uncertain.

Date received: May 11, 2000

Copyright © 2000 by the author(s). The author(s) of this document and the organizers of the conference have granted their consent to include this abstract in Atlas Conferences Inc. Document # cafc-30.