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The B.E. Journal of Theoretical Economics

Editor-in-Chief: Schipper, Burkhard

Ed. by Fong, Yuk-fai / Peeters, Ronald / Puzzello , Daniela / Rivas, Javier / Wenzelburger, Jan

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Passing the Buck in Sequential Negotiation

Derek J Clark1 / Jean-Christophe Pereau2

1University of Tromsø,

2Université Paris Est,

Citation Information: The B.E. Journal of Theoretical Economics. Volume 8, Issue 1, ISSN (Online) 1935-1704, DOI: 10.2202/1935-1704.1433, December 2008

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We consider bargaining between three firms that are all essential in creating a surplus. One of the firms is dominant in the sense that it ultimately decides whether the surplus will be created. The other firms have an incentive to get a large share of the pie for themselves, but leaving enough for the dominant firm that it finds it profitable to create the surplus. Hence, the smaller firms have preferences over who they take their share from. The bargaining takes place in sequence, and we identify optimal choice of bargaining framework for each firm. Conditions are presented under which a firm would prefer not to be represented at a stage in the negotiation process, and we show that the preferred order of bargaining for the dominant firm is also that which maximizes the total expected surplus from negotiation.

Keywords: bargaining; surplus division; dominant firm

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