Learning while Trading: Experimentation and Coasean Dynamics

Niccolo Lomys (University of Mannheim)

January 15, 2018, 14:00–15:30


Room MS001

Job Market Seminar


I study a dynamic bilateral bargaining problem with incomplete information where better outside opportunities may arrive during negotiations. Gains from trade are uncertain. In a good-match market environment, outside opportunities are not available. In a bad-match market environment, superior outside opportunities stochastically arrive for either or both parties. The two parties begin their negotiations with the same belief on the type of the market environment. As arrivals are public information, learning about the market environment is common. One party, the seller, makes price offers at every instant to the other party, the buyer. The seller has no commitment power and the buyer is privately informed about his own valuation. This gives rise to rich bargaining dynamics. In equilibrium, there is either an initial period with no trade or trade starts with a burst. Afterwards, the seller screens out buyers one by one as uncertainty about the market environment unravels. Delay is always present, but it is inefficient only if valuations are interdependent. Whether prices increase or decrease over time depends on which party has a higher option value of learning. The seller exercises market power. In particular, when the seller can clear the market in finite time at a positive price, prices are higher than the competitive price. However, market power need not be at odds with efficiency. Applications include durable-good monopoly without commitment, wage bargaining in markets for skilled workers, and takeover negotiations.

See also