Bilateral Bargaining with Externalities

Abstract

This paper provides an analysis of a non‐cooperative pairwise bargaining game between agents in a network. We establish that there exists an equilibrium that generates a coalitional bargaining division of the reduced surplus that arises as a result of externalities between agents. That is, we provide a non‐cooperative justification for a cooperative division of a non‐cooperative surplus. The resulting division is related to the M yerson‐ S hapley value with properties that are particularly useful and tractable in applications. We demonstrate this by examining buyer‐seller networks and vertical foreclosure.