Bargaining with Interdependent Values, Experience Effects and the Coase Conjecture

We study dynamic bargaining with asymmetric information and interdependent values. We show that as the gap between the cost and value of the weakest type shrinks to zero, the continuous time limit of equilibria changes dramatically from rare bursts of trade with long periods of inactivity to a smooth screening down the demand function, independent of the distribution. If we interpret the model as a durable goods problem with experience curve effects, then the monopoly problem is consistent with perfect competition. In other words, even though the monopoly outcome is inefficient, it converges to the competitive equilibrium outcome as the commitment power disappears. The competitive equilibrium is inefficient because of the positive externality caused by the experience effects.