Mediation: Incomplete information bargaining with filtered communication

Abstract

We analyze a continuous-time bilateral double auction in the presence of two-sided incomplete information and a smallest money unit. A distinguishing feature of our model is that intermediate concessions are not observable by the adversary: they are only communicated to a passive auctioneer. An alternative interpretation is that of mediated bargaining. We show that an equilibrium using only the extreme agreements always exists and display the necessary and sucient condition for the existence of (perfect Bayesian) equilibra which yield intermediate agreements. For the symmetric case with uniform type distribution we numerically calculate the equilibria. We find that the equilibrium which does not use compromise agreements is the least ecient, however, the rest of the equilibria yield the lower social welfare the higher number of compromise agreements are used.