DP7774 Bargaining cum Voice

Author(s): Hans Gersbach, Hans Haller
Publication Date: April 2010
Keyword(s): articulation of outside options, bargaining, Competitive equilibria, group formation, Power of Voice
JEL(s): D13, D5, D71
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7774

We propose a formal concept of the power of voice in the context of a simple model where individuals form groups and trade in competitive markets. Individuals use outside options in two different ways. Actual outside options reflect the possibility to exit or to join other existing groups. Hypothetical outside options refer to hypothetical groups that are ultimately not formed. Articulation of hypothetical outside options in the bargaining process determines the relative bargaining power of the members of a group, which constitutes an instance of the power of voice. The adopted equilibrium concept, competitive equilibrium with free group formation and bargaining cum voice, endogenizes the outside options as well as the power of voice. We establish existence of such equilibria and we explore their properties.