A model of seller holdout

Abstract

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.