On the first-offer dilemma in bargaining and negotiations

Abstract

In bargaining and negotiations, should one make the first offer or wait for the opponent to do so? Practitioners support the idea that moving first in bargaining is a mistake, while researchers find strong evidence that first-movers benefit from an anchoring effect. This paper addresses these issues from a theoretical perspective for the first time in the literature. It is found that first-movers benefit from a strategic advantage, while second-movers benefit from an information advantage. Therefore, the existence of first- and second-mover advantages depends crucially on the relative strength of these two effects. In line with the experimental literature, first-mover advantages are more prevalent, but second-mover advantages appear in very reasonable and realistic bargaining situations. Among other results, it is found that second-mover advantages require the existence of high-types (patient individuals) and differences in individuals’ preferences. The results also suggest a systematic first-mover advantage in contexts of great ambiguity, in which the anchoring effect of the first offer becomes the driving force.