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The Efficiency of Real-World Bargaining: Evidence from Wholesale Used-Auto Auctions

Bradley Larsen

NBER Working Paper No. 20431
Issued in August 2014, Revised in September 2019
NBER Program(s):Industrial Organization Program

This study empirically quantifies the efficiency of a real-world bargaining game with two-sided incomplete information. Myerson and Satterthwaite (1983) and Williams (1987) derived the theoretical ex-ante efficient frontier for bilateral trade under two-sided uncertainty and demonstrated that it falls short of ex-post efficiency, but little is known about how well bargaining performs in practice. Using about 265,000 sequences of a game of alternating-offer bargaining following an ascending auction in the wholesale used-car industry, this study estimates (or bounds) distributions of buyer and seller valuations and evaluates where realized bargaining outcomes lie relative to efficient outcomes. Results demonstrate that the ex-ante and ex-post efficient outcomes are close to one another, but that the real bargaining falls short of both, suggesting that the bargaining is indeed inefficient but that this inefficiency is not solely due to the information constraints highlighted in Myerson and Satterthwaite (1983). Quantitatively, findings indicate that 17–24% of negotiating pairs fail to trade even though gains from trade exist, leading an efficiency loss of 12–23% of the available gains from trade.

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Document Object Identifier (DOI): 10.3386/w20431

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