An Alternating-Offers Model of Multilateral Negotiations

I develop an infinite-horizon alternating-offers model of multilateral negotiations, a common means of exchange whose strategic complexity has hindered previous modeling efforts. Multilateral negotiations occur in numerous settings in which one party wishes to trade with one of several others, but for concreteness I consider a buyer facing multiple sellers offering potentially different amounts of surplus to be split. The basic model provides surprising insights about introducing competition to an initially bilateral setting, while straightforward extensions provide empirical predictions about how the buyer’s choice of conducting procurement via multilateral negotiations or auctions is affected by factors including the number of sellers, uncertainty when making the choice, and costs of participating in the procurement process. More generally the model provides a tractable foundation for analyzing strategic problems in settings featuring multilateral negotiations.