The Role of External Search in Bilateral Bargaining

We consider the problem of bargaining between two individuals who can also search for possible alternatives to each other's offers. We explicitly incorporate the search activity into the process of bargaining: a disagreement in bargaining will lead each individual to search for an outside offer in the hope of improving his future bargaining position and attaining a more favorable outcome. We model the interlaced phases of bargaining and search over time as an extensive noncooperative game. We characterize the associated subgame-perfect equilibrium outcome and strategies. Finally, we show that superior search ability yields an individual a more favorable outcome and hence represents a greater bargaining strength.