Business-to-Business Negotiations with Outside Options

This paper considers price negotiations between content providers and media distributors. The starting point is the observation that major content providers offer a range of products, some of which are hard to replace for distributors. For other products offered by the same content providers there may exist alternatives (outside options) for the distributors. We consider a bilateral bargaining framework where one content provider and one distributor negotiate over linear wholesale prices for two media products. The distributor has a threat to execute an outside option for one of the products. In contrast to the case with a single-good content provider, the distribution of bargaining power affects wholesale prices also when the outside option is binding. The higher the distributor’s bargaining weight in the outside option, the lower the wholesale prices for both products. Remarkably, we find that, other things equal, the wholesale prices are identical for both products, even though an outside option only exists for one of them. Gains for the distributor from threatening to use its outside option decreases in its own bargaining weight.