Journal of Economic Behavior Organization Vol. 44 2001 177–200
The information advantage in two-person bargaining with incomplete information
Darryl A. Seale
a
, Terry E. Daniel
b
, Amnon Rapoport
c,∗
a
University of Nevada Las Vegas, Las Vegas, Nevada, USA
b
University of Alberta, Edmonton, Alberta., Canada
c
Department of Management and Policy, University of Arizona, 405 McClelland Hall, Tucson, AZ 85721-0108 USA
Received 12 October 1998; received in revised form 5 July 1999; accepted 8 July 1999
Abstract
The sealed-bid k-double auction is a mechanism used to structure bilateral bargaining under two-sided incomplete information. In the process of testing whether or not the observed bid and
ask functions are in agreement with the Bayesian linear equilibrium solution under asymmetric information conditions, we find a strong information disparity effect. The trader favored by the
information disparity, whether buyer or seller, receives a significantly larger share of the realized gains from trade than that predicted by the theory. A reinforcement-based learning model is formu-
lated and tested. It accounts successfully for most of the variability in the round-to-round individual decisions. © 2001 Elsevier Science B.V. All rights reserved.
JEL classification: c72; c92
Keywords: Sealed-bid k-double auction; Bilateral bargaining; Information disparity; Reinforcement-based
learning
1. Introduction
It is a commonly accepted truism that in bargaining situations ‘information is power’. Nearly all of the practical and academic literature on the topic highlights the advantage
conveyed to the party knowing the most about the other’s position. In the bargaining situation considered in this paper, that of a buyer and a seller negotiating the sale price of a single
item under two-sided uncertainty, information refers to how much each party knows about
∗
Corresponding author. Tel.: +1-520-621-9325; fax: +1-520-621-4171. E-mail address:
amnonu.arizona.edu A. Rapoport. 0167-268101 – see front matter © 2001 Elsevier Science B.V. All rights reserved.
PII: S 0 1 6 7 - 2 6 8 1 0 0 0 0 1 5 7 - 8
178 D.A. Seale et al. J. of Economic Behavior Org. 44 2001 177–200
the reservation value of the other. The party that is most successful in narrowing down the uncertainty about the other’s value is usually best able to press for a favorable transaction
price. The present paper reports on experiments that have uncovered a significant and robust information effect in bilateral bargaining.
In a seminal paper, Chatterjee and Samuelson 1983 constructed Bayesian Nash linear equilibrium strategies LES for the buyer and seller in the sealed-bid k-double auction
mechanism and determined the profit that each person could expect from employing these strategies. In the course of a series of laboratory experiments, we have found general support
for this model. However, with rare exceptions, we have also found that our sellers who were in a weak information position achieved significantly lower gains from trade than they
could have obtained if they bid as LES suggests and our buyers, who were endowed with an information advantage, achieved significantly higher gains.
This paper proceeds as follows. We first describe the sealed-bid k-double auction mecha- nism and then present the LES for two bargaining situations examined in the present study.
Our focus is on asymmetric two-person bargaining with incomplete information Linhart et al., 1992 in which one of the traders has a distinct information advantage. In contrast to
out previous studies Daniel et al., 1998, hereafter DSR; and Rapoport et al., 1998, hereafter RDS, the information structure examined in the present paper favors the seller, not the buyer.
We next present two new experiments that manipulate the amount of information that the seller possesses about the buyer’s reservation values. These experiments are mirror images
of two previous experiments conducted by DSR in which the information advantage was conferred on the buyer. We exploit this feature of the design to measure the increase in profit
that the trader-either buyer or seller-derives from the information advantage. Our results show that in the environment we examine property rights do not matter; rather, it is the infor-
mation advantage that determines the change in profit from equilibrium play. They also show that the learning model proposed by DSR is equally applicable to account for the individual
asks and bids in bargaining situations that favor the seller. The concluding section discusses the applicability of these results to less structured two-person bargaining situations.
2. The sealed-bid kkk-double auction mechanism
