RIEB Discussion Paper Series No.2025-20

Title

Bilateral Bargaining with a Biased Intermediary

Abstract

Bilateral bargaining is often facilitated by an intermediary. In many settings, however, the intermediary shares interests with one of the negotiating parties and lacks both commitment and enforcement power. This paper examines how such a biased intermediary affects bargaining outcomes. I consider a stylized bilateral trade framework and compare two bargaining games: a seller-offer bargaining game, in which the seller proposes a price, and a mediated bargaining game, in which the intermediary proposes a price and traders pay her commissions. By focusing on the set of communication equilibria in both games, I characterize the outcomes achievable when players are allowed general preplay and intraplay communication. I show that if the intermediary's bias is sufficiently small, the mediated bargaining game can yield a higher expected social surplus than the seller-offer bargaining game in the second-best scenario. This result provides a rationale for the widespread use of biased intermediaries in practice, even when their bias is common knowledge.

Keywords

Bargaining; Intermediary; Bias; Communication equilibrium

JEL Classification

C78, D82

Inquiries

Yusuke YAMAGUCHI*
Institute of Social and Economic Research, The University of Osaka
Toulouse School of Economics
Junior Research Fellow, RIEB, Kobe University

*This Discussion Paper won the Kanematsu Prize (FY 2024).