An Experimental Study of Buyer-Seller Negotiation with One-Sided Incomplete Information and Time Discounting

Abstract

We study a multiperiod bargaining mechanism in which a seller negotiates with a buyer over the price of an indivisible good. It is common knowledge that the good has zero value to the seller. Its value to the buyer is privately known, distributed independently of the seller’s value according to a distribution that is common knowledge. Bargaining proceeds as follows. The seller sets a price and offers the buyer an opportunity to purchase the good. The buyer either waits for at least one more period or agrees to purchase the good at the given price. If the buyer refuses the offer, then the process is repeated with seller making a new offer on the next period. Our findings reveal several behavioral regularities, which do not support the sequential equilibrium for this bargaining mechanism. In line with recent developments in behavioral decision theory and game theory, which assume bounded rationality, we find that subjects follow simple rules of thumb in choosing strategies, reflected in the behavioral consistencies observed in the study.