Break-up fees and bargaining power in sequential contracting

When a buyer negotiates in sequence with two potential sellers of a good, the outcome of each negotiation depends on all three players' bargaining powers. Assuming all parties are symmetrically informed, we find that the first seller's payoff is increasing in his own and the second seller's bargaining power. On the other hand, the second seller's payoff is decreasing in the first seller's bargaining power and, in some cases, also in his own bargaining power. We characterize when contracts will contain break-up fees. All results extend to the case of a seller negotiating in sequence with two buyers. © 2009 Elsevier B.V.

Duke Scholars

Author Leslie M. Marx Fuqua School of Business