Bilateral Bargaining with a Biased Intermediary

Bilateral bargaining is often mediated by a third party, called an “intermediary.” In many cases, the intermediary shares some interest with one of the two parties in the negotiation and cannot commit to and enforce his decision. This paper studies the effect of such a “biased” intermediary without commitment and enforcement power in a fully general communication structure. I consider a bilateral trade model à la Myerson and Satterthwaite (1983) with binary valuations in which the intermediary offers a price to the traders. I focus on the set of sequential communication equilibria of the game, which characterizes what the players can achieve if they can freely communicate with each other. I show that the intermediary’s bias is detrimental to efficiency, however small it is. I also characterize the second-best equilibrium and show that the expected trade surplus will decrease if the degree of bias exceeds a certain threshold