Optimal finite horizon bargaining mechanisms with refusal cost

Abstract

This paper considers a bargaining problem under asymmetric information between a seller and multiple buyers for selling given perishable items over a finite period. It is assumed that the seller faces a refusal cost if the item does not get sold. The problem is modelled as a Markov decision process that endogenises the marginal inventory valuation of the seller. This paper compares four bilateral bargaining mechanisms namely seller posting price, buyer posting price, difference splitting between seller's and buyer's valuation, and negotiation. For low refusal cost, the seller prefers posting price and splitting the difference between both valuations when he is in strong and weak positions, respectively. For high cost, the seller is indifferent between negotiation and buyer's posting. Also, this paper compares bargaining mechanisms and dynamic pricing with and without the refusal cost. This paper conducts simulation experiments to validate the findings of the model.