Bilateral bargaining with externalities

This paper provides an analysis of a non-cooperative but bilateral bargaining game between agents in a network. We establish that there exists an equilibrium that generates a cooperative bargaining type of division of the reduced surplus that arises as a result of non-pecuniary externalities between agents. That is, we have a non-cooperative justification for a cooperative division of a non-cooperative surplus. In so doing, we provide a non-cooperative foundation for the Myerson-Shapley value as well as a new bargaining outcome that contains properties making it particularly useful and tractable in applications