How Communication Improves Efficiency in Bargaining Games, Games and Economic Behavior
We study a double auction with two-sided private information and preplay communication, for which Myerson and Satterthwaite (1983, J. Econ. Theory 28, 265-281) showed that all equilibria are inefficient and the Chatterjee-Samuleson linear equilibrium is most efficient. Like several others, we find that players use communication to surpass equilibrium levels of efficiency, especially when the communication is face-to-face. Our main contribution is an analysis of how communication helps the parties achieve such high levels of efficiency. We find that when preplay communication is allowed, efficiency above equilibrium levels is a result of what we call "dyadic" strategies that allow the parties to coordinate on a single price that reflects both parties' valuations.
Kathleen L. Valley, Leigh Thompson, Robert Gibbons, Max H Bazerman
Valley, L. Kathleen, Leigh Thompson, Robert Gibbons, and Max H Bazerman. 2002. How Communication Improves Efficiency in Bargaining Games. Games and Economic Behavior. 38(1): 127-155.