A buyer and a seller negotiating a sale price. The buyer has some privately known value and the seller has some privately known cost and with positive probability there are gains from trade but with positive probability the seller’s cost exceeds the buyers value. (So this is the Myerson-Satterthwaite setup.)
Do three treatments.
- The experimenter fixes a price in advance and the buyer and seller can only accept or reject that price. Trade occurs if and only if they both accept.
- The seller makes a take it or leave it offer.
- The parties can freely negotiate and they trade if and only if they agree on a price.
Theoretically there is no clear ranking of these three mechanisms in terms of their efficiency (the total gains from trade realized.) In practice the first mechanism clearly sacrifices some efficiency in return for simplicity and transparency. If the price is set right the first mechanism would outperform the second in terms of efficiency due to a basic market power effect. In principle the third treatment could allow the parties to find the most efficient mechanism, but it would also allow them to negotiate their way to something highly inefficient.
A conjecture would be that with a well-chosen price the first mechanism would be the most efficient in practice. That would be an interesting finding.
A variation would be to do something similar but in a public goods setting. We would again compare simple but rigid mechanisms with mechanisms that allow for more strategic behavior. For example, a version of mechanism #1 would be one in which each individual was asked to contribute an equal share of the cost and the project succeeds if and only if all agree to their contributions. Mechanism #3 would allow arbitrary negotation with the only requirement be that the total contribution exceeds the cost of the project.
In the public goods setting I would conjecture that the opposite force is at work. The scope for additional strategizing (seeding, cajoling, guilt-tripping, etc) would improve efficiency.
Anybody know if anything like these experiments have been done?
Cheap Talk 
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May 12, 2011 at 7:12 am
PLW
Not exactly on point, but in there are a series of papers by Thomas an Wilson in the spirit, starting with
A Comparison of Auctions and Multilateral Negotiations
Charles J Thomas, Bart J Wilson in The RAND Journal of Economics (2002)
“We compare the well-known first-price auction with a common but previously unexamined exchange process that we term “multilateral negotiations.” In multilateral negotiations, a buyer solicits price offers for a homogeneous product from sellers with heterogeneous costs, and then plays the sellers off one another to obtain additional price concessions. Using experimental methods, we find that transaction prices are statistically indistinguishable in the two institutions with a sufficiently large number of sellers, but that prices are higher in multilateral negotiations than in first-price auctions as the number of sellers decreases. With fewer sellers, the institutions are equally efficient, but with more sellers, there is some evidence that multilateral negotiations are slightly more efficient.”
May 14, 2011 at 7:49 am
Navin
See this paper by Valley et al:
Click to access 2002-GEB-Howcommunicationimprovesefficiencyinbargaininggames.pdf
They implemented a double-auction in which the Chatterjee-Samuelson linear equilibrium achieves the MS upper bound. In a no-communication treatment, trades (and bid strategies) are more or less consistent with this prediction. But in treatments with communication, efficiency is higher: even more so when communication is face to face rather than anonymous.
What is relevant for your experiment is that in their communication treatments, subjects often coordinated on a single price in the ensuing double auction. So a plausible hypothesis is that outcomes in your Treatment #3 would be similar. (They also cite a paper by Radner and Schotter that may be even closer to your Treatment #3, but I haven’t read that.) Since almost all profitable trades are executed, it is suggestive that negotiation, particularly if face to face, may outperform #1 and #2.
May 14, 2011 at 8:21 am
jeff
Thanks navin!