Matching markets with price bargaining

• Published in: Experimental economics : a journal of the Economic Science Association 2011-09, Vol.14 (3), p.322-348
• Main Authors: Otto, Philipp E., Bolle, Friedel
• Format: Article
• Language: English
• Subjects: Allocative efficiency; Bargaining; Bargaining models; Behavioral/Experimental Economics; C78; C91; D40; D82; Economic behaviour; Economic models; Economic theory; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Experiments; Game Theory; Investigations; J41; Labor market; Market prices; Market theory; Marriage; Matching market; Microeconomics; Negotiations; Operations Research/Decision Theory; Optimal allocation; Preferences; Price negotiation; Prices; Profit; Social and Behav. Sciences; Studies
• ISSN: 1386-4157; 1573-6938
• DOI: 10.1007/s10683-010-9270-4

The extant microeconomic literature on matching markets assumes ordinal preferences for matches, while bargaining within matches is mostly excluded. Central for this paper, however, is bargaining over joint profits from potential matches. We investigate, both theoretically and experimentally, a seemingly simple allocation task in a 2×2 market with repeated negotiations. When inefficiency is possible, about 1/3 of the complete matches are inefficient and, overall, more than 3/4 of the experimental allocations are unstable. These results strongly contradict existing bargaining theories requiring efficient matches. Even with regard to efficient matches, the tested theories perform poorly. Standard bargaining and behavioral concepts, such as Selten’s ( 1972 ) Equal Division Core, are outperformed by the simplistic ε -Equal Split, i.e., an equal split of the joint profit plus/minus ε .