Quantifying Bargaining Power Under Incomplete Information: A Supply-Side Analysis of the Used-Car Industry

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This study quantifies bargaining power in supply-side negotiations with incomplete information, where car dealers negotiate inventory prices with large wholesalers after an auction. We measure an agent’s bargaining power by where the agent’s expected surplus lies relative to a benchmark mechanism favoring the agent and one favoring the opponent. We consider second-best benchmarks, which account for information con- straints, and first-best benchmarks, which do not, as well as benchmarks that account for the effect of competition on bargaining power. We propose a direct-mechanism method for estimating a seller’s private value as the gradient of a menu from which she chooses a secret reserve price. Bargaining power weights offer insights about inef- ficiency, as bargaining is not a zero-sum game when agents have incomplete informa- tion. On average, dealers (buyers) have less bargaining power than sellers relative to a benchmark where dealers face no competition. Accounting for the direct effect of competition, dealers have more bargaining power than sellers, achieving close to the highest possible surplus given competition. This holds true when the seller is a man- ufacturer, a finding that is consistent with manufacturers’ recent movement toward direct-to-consumer used-car sales.