Abstract
This paper describes a non-cooperative theory of bargaining in stationary markets that provides a generalization of the Nash bargaining solution to coalition formation problems. This generalization prevents outside options from being determined in a circular way and, remarkably, always yields a unique prediction. The equilibrium uncovers an endogenous vertical market structure such that the effects of changes in fundamentals propagate—via outside options—from the top down, but not vice versa. In markets that are vertically differentiated by skill, changes at the bottom do not affect those at the top. Moreover, if there is positive assortative matching, changes at the top affect those at the bottom only if they also affect everyone in between.
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