Surreal illustration of a negotiation scenario with hidden information influencing the outcome.

The Art of the Deal: Navigating Bargaining When Disagreement is a Secret

Rhea Morgan in Business & Economy December 2025 • 4 min read.

"Uncover the hidden dynamics of two-person bargaining and how private knowledge can make all the difference."

Imagine trying to strike a deal, whether it’s negotiating a salary, dividing assets in a partnership, or even haggling at a market. Now, imagine that you know your fallback option if the deal falls through, but the other person doesn’t know what that option is. This is the world of bargaining with private disagreement points, where what happens if you fail to agree remains a secret.

In economics, this scenario presents a fascinating puzzle. How does this private information – the knowledge of your own ‘walk-away point’ – influence the outcome of the negotiation? Conventional wisdom might suggest that having a strong fallback gives you an edge. But what if that edge is invisible to the other party? That’s the question that economists Eric van Damme and Xu Lang tackled in their research.

Their work, rooted in game theory, explores how private knowledge of disagreement payoffs impacts bargaining outcomes. It challenges some intuitive assumptions and reveals surprising limitations on how much your secret fallback can actually help you. Let’s unpack their findings and see what they mean for anyone involved in negotiations.

The Core Concept: Bargaining with Hidden Information

Surreal illustration of a negotiation scenario with hidden information influencing the outcome.

At its heart, the research focuses on situations where two people need to reach an agreement, but only they know what the consequences of not reaching that agreement would be. Think of it as knowing your bottom line in a negotiation, but the other person is in the dark. The researchers created a model to represent this, where the value of a deal and the potential outcomes of disagreement are key elements.

The central question they address is whether these private disagreement payoffs (what happens if you walk away) significantly alter the bargaining process. The initial intuition might be that someone with a better outside option would naturally bargain harder and achieve a more favorable outcome. However, the study reveals that this isn't always the case.

The Pareto Frontier: Imagine a graph where each point represents a possible outcome of the negotiation, showing how much each person benefits. The Pareto frontier is the line connecting all the points where you can't make one person better off without making the other worse off. It represents the set of efficient outcomes.
Linear vs. Non-Linear Frontiers: A linear Pareto frontier means the trade-off between the two parties is constant. A non-linear frontier indicates that the trade-off changes depending on where you are on the line.
Efficient Mechanisms: These are the rules or processes that guide the bargaining, ensuring that the final outcome is on the Pareto frontier – meaning no resources are wasted, and the agreement is the best possible for both sides, given the circumstances.

The model assumes that both players understand that coming to an agreement is more beneficial than not agreeing. What happens if they don’t agree? This disagreement, is a piece of private information. Both players know this, so the Pareto efficiency needs to be reached. How will these outside options influence the bargaining outcome?

Key Takeaways for Everyday Negotiations

While the research is theoretical, it offers some practical insights for real-world negotiations. The biggest takeaway is to be mindful of assumptions. Don’t automatically assume that a better outside option will guarantee a better deal, especially if the other party isn’t aware of that option. Focus on creating mutually beneficial solutions, and remember that transparency and building trust can sometimes be more valuable than playing a secretive game.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2211.0683,

Title: Two-Person Bargaining When The Disagreement Point Is Private Information

Subject: econ.th

Authors: Eric Van Damme, Xu Lang

Published: 13-11-2022

Everything You Need To Know

What is the core concept explored in the research on bargaining?

The core concept revolves around bargaining scenarios where individuals have private disagreement points, meaning they know their fallback option if a deal fails, while the other party does not. This research, rooted in game theory, investigates how this hidden information, the knowledge of your own 'walk-away point,' influences the outcome of the negotiation. It looks at how these private disagreement payoffs impact bargaining outcomes, challenging the assumption that a better outside option always leads to a better deal.

How do private disagreement payoffs affect the bargaining process, according to the research?

The research investigates whether private disagreement payoffs significantly alter the bargaining process. The initial intuition that someone with a better outside option would naturally bargain harder and achieve a more favorable outcome isn't always the case. The study, conducted by Eric van Damme and Xu Lang, reveals surprising limitations on how much your secret fallback can actually help you, especially if the other party is unaware of the specific 'walk-away point'. The model shows that knowing your own bottom line isn't always a guaranteed advantage.

Explain the Pareto Frontier and its relevance to the bargaining outcomes.

The Pareto Frontier is a key concept used to analyze the efficiency of bargaining outcomes. It's visualized as a graph where each point represents a possible agreement outcome, and the Pareto Frontier connects the points where you can't improve one person's benefit without worsening the other's. It essentially represents all the 'efficient' outcomes. The model considers both linear and non-linear Pareto Frontiers, helping to understand how different trade-offs between parties influence the final agreement, with Efficient Mechanisms ensuring the final outcome is on the Pareto Frontier.

What are Efficient Mechanisms in the context of bargaining, and why are they important?

Efficient Mechanisms are the rules or processes that guide the bargaining process. They are designed to ensure that the final outcome of the negotiation is on the Pareto Frontier. This means that the agreement reached is the best possible for both parties, given the circumstances, and no resources are wasted. Their importance lies in achieving Pareto efficiency and ensuring the agreement is the most beneficial for both parties involved, considering their individual 'walk-away point' scenarios.

What practical insights can be derived from this research for everyday negotiations?

The most significant takeaway for everyday negotiations is to be mindful of assumptions. Avoid assuming that a better outside option guarantees a superior deal, particularly if the other party is unaware of that option or the 'walk-away point'. The research highlights the importance of creating mutually beneficial solutions and emphasizing transparency and trust, which can sometimes outweigh the advantages of secretive strategies. This suggests that focusing on building strong relationships and finding common ground can be more effective than attempting to leverage hidden information.