Summary.
We model a buyer who wishes to combine objects owned by two separate sellers in order to realize higher value. Sellers are able to avoid entering into negotiations with the buyer, so that the order in which they negotiate is endogenous. Holdout occurs if at least one of the sellers is not present in the first round of negotiations. We demonstrate that complementarity of the buyer’s technology is a necessary condition for equilibrium holdout. Moreover, a rise in complementarity leads to an increased likelihood of holdout, and an increased efficiency loss. Applications include patents, the land assembly problem, and mergers.
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Received: 20 November 2002, Revised: 4 September 2003
JEL Classification Numbers:
L14, L21, C78.
Correspondence to: Flavio Menezes
This paper benefited from insights by Paulo Monteiro. Thanks to seminar participants at the ANU, the University of Sydney and the University of Arizona. Murali Agastya, Robert Innes, John Quiggin, Kunal Sengupta and anonymous referees provided useful feedback. F. Menezes gratefully acknowledges the support of ARC grant (no. 000000055). Pitchford is grateful for the use of economics department facilities while a visiting scholar at Harvard University.
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Menezes, F., Pitchford, R. A model of seller holdout. Economic Theory 24, 231–253 (2004). https://doi.org/10.1007/s00199-003-0432-x
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DOI: https://doi.org/10.1007/s00199-003-0432-x