The Structure of Negotiations: Incomplete Agreements and the Focusing Effect
Abstract: We study the use of incomplete agreements in a deterministic environment. We show that, if preferences are context dependent, the negotiating players may negotiate in stages: first signing an incomplete agreement and then finalizing the outcome of the negotiation. Furthermore, if preferences are context dependent because of the focusing effect, incomplete agreements are used to eliminate extreme, off-equilibrium outcomes from the possible bargaining solutions. Our framework also justifies the existence of a number of pre-bargaining actions. For example, a seller may enter the negotiation over the sale of a good having already announced a maximum price. Similarly, a seller may prefer to produce a good and later bargain over the price of the good (i.e. may prefer to be held up), rather than simultaneously bargain over price and quality.
