The Efficiency of Real-World Bargaining: Evidence from Wholesale Used-Auto Auctions

This study quantifies the efficiency of a real-world bargaining game with two-sided incomplete information. Myerson and Satterthwaite (1983) and Williams (1987) derived the theoretical efficient frontier for bilateral trade under two-sided uncertainty, but little is known about how well real-world bargaining performs relative to the frontier. The setting is wholesale used-auto auctions, an $80 billion industry where buyers and sellers participate in alternating-offer bargaining when the auction price fails to reach a secret reserve price. Using 270,000 auction/bargaining sequences, this study nonparametrically estimates bounds on the distributions of buyer and seller valuations and then estimates where bargaining outcomes lie relative to the efficient frontier. Findings indicate that the dynamic mechanism attains 80–91% of the surplus which can be achieved on the efficient frontier. ∗I thank Panle Jia Barwick, Glenn Ellison, and Stephen Ryan for invaluable help and advice throughout this project. I would also like to thank Isaiah Andrews, Victor Chernozhukov, Joachim Freyberger, Ariel Pakes, Paulo Somaini, and Juuso Toikka for extremely helpful suggestions. This paper also benefited from conversations with many MIT graduate students and faculty, as well as John Asker, Matias Cattaneo, Mingli Chen, Denis Chetverikov, Peter Cramton, Francesco Decarolis, Bernard Elyakime, Ian Gale, David Genesove, Ken Hendricks, Kate Ho, Kyoo-il Kim, Elena Krasnokutskaya, Katie Larsen, Greg Lewis, Thierry Magnac, Francesca Molinari, Christopher Palmer, Christopher Parmeter, Parag Pathak, Jimmy Roberts, Mark Satterthwaite, Alan Sorensen, Matt Shum, Jean Tirole, and many seminar and conference participants. I thank several anonymous auction houses for providing extensive data and data help. I also thank numerous employees and customers of these auction houses, as well as Freeman Dawson and Steven Lang, for providing institutional details. I acknowledge support from the National Science Foundation Graduate Research Fellowship under Grant No. 0645960. Earlier versions of this paper were circulated under the title, “The Efficiency of Dynamic, Post-Auction Bargaining: Evidence from Wholesale-Used Auto Auctions.”