A Bidding Mechanism to Resolve Asymmetry in Alternating Offer Bargaining

Abstract

It is well known that the unique P.E. of the alternating-offer bargaining games in Rubinstein (1982) suffers the first mover advantage problem arising from the artificial procedural asymmetry in dynamic strategic models. We introduce a bidding mechanism as a supergame or a mechanism to resolve the artificial procedural asymmetry in dynamic strategic models of complete information in Rubinstein(1982) in which the players bid for the right to choose a particular sequence of alternating game to play. We show that there exists a unique equilibrium bidding strategies of the players in this bidding mechanism in which the players submit equal bids. That is, the players are indifferent between winning and losing the bid. Correspondingly, there exists a unique P.E. in the bidding mechanism. In the unique P.E. shares of the bidding mechanism. In the unique P.E. shares of the bidding mechanism, the players with the same preferences and disagreement payoffs indeed share the pie equally by half and half so that the asymmetry of the first-mover advantage in the alternating-offer bargaining games disappears. Yet, our results also show the effect of the difference in time preferences on the P.E. outcome such that the more patient player gets more in the unique P.E. of the bidding mechanism.