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The information advantage in two-person bargaining with incomplete information

Authors Seale, Darryl A.
Daniel, Terry E.
Rapoport, Amnon
Issue Date 1998-10
Summary The sealed-bid k-double auction is a mechanism used to structure bilateral bargaining under two-sided incomplete information. This mechanism has been tested in several experiments in which subjects are asked to bargain repeatedly with the same partner or with randomly rotated partners under conditions of information disparity favoring either the buyer or seller. In the process of testing whether or not the observed bid and ask functions are in agreement with the Bayesian linear equilibrium solution (LES) constructed by Chatterjee and Samuelson (1983), we have found a surprisingly strong information disparity effect. The trader favored by the information disparity, whether buyer or seller, receives a significantly larger share of the realized gains from trade than that predicted by the theory. This result is consistent and stable over several different experiments. It has important prescriptive implications for successful bilateral bargaining wherever there is an information imbalance. In an attempt to explain the dynamics of play, a reinforcement-based learning model is formulated and tested. It accounts successfully for most of the variability in the round-to-round individual decisions, and lends insight towards understanding the information advantage.
Language English
Format Working paper