Bargaining and search: An experimental study

We study experimentally two versions of a model buyer and a seller bargain over the price of a good; however, the buyer can choose to leave the negoti ation table to search for other alternatives. Under one version, if the buy er chooses to search for a better price, the opportunity to purchase the go od at the stated price is gone. Under the second version, the seller guaran tees the same price if the buyer chooses to return immediately after a sear ch (presumably because a better price could not be found). In both cases, t he buyer has a fairly good idea about what to expect from the search, but b ecause the search is costly, he has to weigh the potential benefits of the search against its cost. It turns out (theoretically) that adding search to a simple bargaining mechanism eliminates some unsatisfactory features of b argaining theory. Our experiment reveals that the model can account for some (but not all) of the behavioral regularities. In line with recent developments in behaviora l decision theory and game theory, which assume bounded rationality and pre ferences over the relative division of a surplus, we find that subjects fol low simple rules of thumb and distributional norms in choosing strategies, which are reflected in the behavioral consistencies observed in this study.