Multistage sealed-bid k-double-auctions: An experimental study of bilateral bargaining

Abstract

Mechanisms that structure bargaining between a potential buyer and potential seller are of perpetual interest to both academics and practitioners. An ‘ideal bargaining mechanism’ would enable bargaining parties to reach an agreement 100 per cent of the time when a deal is possible and collectively realize all possible gains from trade. However, the only individually rational way to achieve maximum efficiency would be for the bargaining parties truthfully to reveal their private valuation, which is typically not in the players’ unilateral best interests. The result: bargaining parties end up ‘walking away’ from a potentially profitable deal, especially when there is a narrow trading range. The single-stage sealed-bid?-double-auction mechanism is no exception. This particular trading mechanism requires that both buyer and seller simultaneously and independently submit an offer to buy/sell (the seller submits an ask s and the buyer submits a bid b). Each player has an independent predetermined reservation value for the indivisible object of potential trade denoted by vs and vb, for the seller and buyer, respectively. Only when both parties have made their offers, are the offers revealed. If the buyer is willing to pay at least as much as the seller is asking, trade occurs at price p and gains from trade for the seller and buyer are p - vs and vs - p, respectively. If there is no trade, then neither trader incurs any cost and the gain for each is taken to be zero.