Searching a bargain: power of strategic commitment

Abstract

This paper investigates the impacts of reputation (in contact with inflexibility) on imperfectly competitive search markets where the sellers announce their initial demands prior to the buyer’s visit and the buyer directs his search for a better deal. The buyer facing multiple sellers can negotiate with only one at a time and can switch his bargaining partner with some cost. The introduction of commitment types that are inflexible in their demands, even with low probabilities, makes the equilibrium of the resulting multilateral bargaining game essentially unique. A modified war of attrition structure is derived in the equilibrium. The model unites and smooths out Bertrand and Diamond price competition models and eliminates their inexplicable predictions.