Sequential bargaining (also known as alternate-moves bargaining, alternating-offers protocol, etc.) is a structured form of bargaining between two participants, in which the participants take turns in making offers. Initially, person #1 has the right to make an offer to person #2. If person #2 accepts the offer, then an agreement is reached and the process ends. If person #2 rejects the offer, then the participants switch turns, and now it is the turn of person #2 to make an offer (which is often called a counter-offer). The people keep switching turns until either an agreement is reached, or the process ends with a disagreement due to a certain end condition. Several end conditions are common, for example:
Several settings of sequential bargaining have been studied.
An alternating-offers protocol induces a sequential game. A natural question is what outcomes can be attained in an equilibrium of this game. At first glance, the first player has the power to make a very favorable offer. For example, in the Dividing the Dollar game, player #1 can offer to give only 1% of the money to player #2, and threaten that "if you do not accept, I will refuse all offers from now on, and both of us will get 0". But this is a non-credible threat, since if player #2 refuses and makes a counter-offer (e.g. give 2% of the money to player #1), then it is better for player #1 to accept. Therefore, a natural question is: what outcomes are a subgame perfect equilibrium (SPE) of this game? This question has been studied in various settings.
Ariel Rubinstein studied a setting in which the negotiation is on how to divide $1 between the two players.[1] Each player in turn can offer any partition. The players bear a cost for each round of negotiation. The cost can be presented in two ways:
Rubinstein and Wolinsky[2] studied a market in which there are many players, partitioned into two types (e.g. "buyers" and "sellers"). Pairs of players of different types are brought together randomly, and initiate a sequential-bargaining process over the division of a surplus (as in the Divide the Dollar game). If they reach an agreement, they leave the market; otherwise, they remain in the market and wait for the next match. The steady-state equilibrium in this market it is quite different than competitive equilibrium in standard markets (e.g. Fisher market or Arrow–Debreu market).
Fudenberg and Tirole[3] study sequential bargaining between a buyer and a seller who have incomplete information, i.e., they do not know the valuation of their partner. They focus on a two-turn game (i.e., the seller has exactly two opportunities to sell the item to the buyer). Both players prefer a trade today than the same trade tomorrow. They analyze the Perfect Bayesian equilibrium (PBE) in this game, if the seller's valuation is known, then the PBE is generically unique; but if both valuations are private, then there are multiple PBE. Some surprising findings, that follow from the information transfer and the lack of commitment, are:
Grossman and Perry[4] study sequential bargaining between a buyer and a seller over an item price, where the buyer knows the gains-from-trade but the seller does not. They consider an infinite-turn game with time discounting. They show that, under some weak assumptions, there exists a unique perfect sequential equilibrium, in which:
Nejat Anbarci[5] studied a setting with a finite number of outcomes, where each of the two agents may have a different preference order over the outcomes. The protocol rules disallow repeating the same offer twice. In any such game, there is a unique SPE. It is always Pareto optimal; it is always one of the two Pareto-optimal options of which rankings by the players are the closest. It can be found by finding the smallest integer k for which the sets of k best options of the two players have a non-empty intersection. For example, if the rankings are a>b>c>d and c>b>a>d, then the unique SPE is b (with k=2). If the rankings are a>b>c>d and d>c>b>a, then the SPE is either b or c (with k=3).
In a later study, Anbarci[6] studies several schemes for two agents who have to select an arbitrator from a given set of candidates:
In all schemes, if the options are uniformly distributed over the bargaining set and their number approaches infinity, then the unique SPE outcome converges to the Equal-Area solution of the cooperative bargaining problem.
Erlich, Hazon and Kraus[7] study the Alternating Offers protocol in several informational settings:
The Dividing-the-Dollar game has been studied in several laboratory experiments. In general, subjects behave quite differently from the unique SPE. Subjects' behavior depends on the number of turns, their experience with the game, and their beliefs about fairness. For details of specific experiments, see:
See also the survey by Güth and Tietz[13] at 1990.
A field study was done by Backus, Blake, Larsen and Tadelis[14] at 2020. They studied back-and-forth sequential bargaining in over 25 million listings from the Best Offer platform of eBay. Their main findings are:
They also report some findings that cannot be rationalized by the existing theories:
They suggest that these findings can be explained by behavioral norms.