Negotiations II

AD and MD negotiate:MD’s payment to AD for magnet rights

• Claiming value: People think hard about the offers but neglect their min/max points (BATNAs). AD can make $5 million anyway. MD can make $4 million without Z-25. MD is indifferent b/n no deal and paying $10 million (of the $14 million).

• Any agreement b/n $5 million and $10 million will lead to a joint surplus of $5 million to El-Tek. With no deal AD earns $5 million, MD earns $4 million, a total of $9 million. With a successful deal, both AD and MD have $14 million to divide.

MD's maximum point

$10 million

MD’s

target price

$2 million

AD’s minimum point

$5 million

AD’s

target price

$12 million

Joint Profit Resolution (mlns)

Creating value through bets• Often the two parties argue needlessly over

conflicting predictions about uncertain future outcomes.

• El-Tek: MD had assessed the profitability of various outcomes ($14 mln. with no restrictions; $13.1 mln with a six-month restriction on sales to AD’s competitors, etc.)

• AD could have assessed MD’s sales at $40 mln. with the above six-month restriction, and $40.9 mln with no restrictions… AD could have asked for $20 mln…

An agreement with bets on predictions for the future

• MD is restricted from selling the magnet to AD’s competitors for six months

• MD receives the first $9 mln. of the profit; AD receives 80% of the profits in excess of $9 mln.

***• If MD’s forecast is better, MD gets more

than a 50:50 split of the joint profit.• If AD’s forecast is correct, AD gets more

than a 50:50 split of the joint profit.

• So, the two parties may use their difference of opinion to craft a contingent contract (договор с условни елементи) that allows each side to bet on its opinion.

• Potential benefits from contingent contracts: – Once parties have agreed to disagree, they

can design a contract based on their different predictions, beliefs, and biases.

– Bets diagnose disingenuous (неискрени) parties (by eliciting bluffs and false claims)

– Bets stimulate performance (to reach and exceed the contractually specified levels)

Different attitudes towards risk

• Let AD and MD agree that MD might earn $13.1 mln. with a six-month restriction against sales to AD competitors.

• They concede, however, that the true outcome could be anywhere from $4.1 mln. to $22.1 mln.

• AD is unwilling to accept the risk of ending below $5 mln it could earn on its own. AD might reject the 50:50 split of profit.

Different attitudes towards risk create a new opportunity

• A possible agreement: AD receives the six-months sales restriction, the first $4 mln. of magnet profits, and 15% of profits above $4 mln.

• Thus AD’s risk concerns are met, and MD receives more of the upside potential.

Differences in time preferences are another source of opportunities

• In a disastrous year MD is seeking immediate profitability… Besides, manufacturing costs to start the new production occur early in the process.

• A possible agreement: MD receives 75% of first-year profits, and 20% of second- year profits. AD gets 25% in the first-year and 80% of the second-year profits. MD gets the immediate return needed, AD is rewarded for waiting.

Gather information to create value: Build trust and share information

• Share information about preferences.

• This is easier said than done. Giving away information could prevent us from claiming value.

• However, parties learn that the long-term joint benefit of creating value more than offsets the one-time gain that a party might achieve through claiming tactics.

Gather information to create value: Ask questions

• You may have information that will work against you if the other party obtains it…

• Negotiating is often seen as a process of influencing the other party. We do more talking than listening. As taught in sales training.

• However, asking questions is the key to obtaining important new information. E.g., “MD, how much would you lose if you did not sell to our competitors? Say, for six months?”

Gather information to create value: Make multiple offers simultaneously

• If one proposal is rejected, you are not advancing.

• If you make three offers at the same time and all are rejected, you could ask, “Which of the three was the least unacceptable?” When answered, you have a new starting point.

Gather information to create value: Search for Post-Settlement Settlement

• Raiffa (1985):We must recognize that a lot of disputes are settled by hard-nosed, positional bargaining. Settled, yes. But efficiently settled? Often not… they quibble about sharing the pie and often fail to realize that perhaps the pie can be jointly enlarged… there may be another carefully crafted settlement that both parties might prefer to the settlement they actually achieved.

The mythical fixed pie of negotiations

• When individuals approach negotiations with a fixed-pie mentality, they assume that their interests necessarily and directly conflict with the interests of the other side.

• Many situations in life are indeed win-lose: athletic competitions, admission to academic programmes, corporate promotion systems etc.

• People tend to generalize from such situations.

The mythical fixed pie of negotiations II

• Mixed-motive situations require both competition and cooperation.

• If, due to win-lose mentality, the competitive element becomes salient, most negotiators develop a strategy for obtaining the largest possible share of the perceived fixed pie.

• Such a focus inhibits the search for creative solutions through mutually beneficial tradeoffs.

“What issue should we discuss first in a negotiation?”

• The most important issue resolved in the beginning?

• Experienced labour negotiators recommend “to start with the easy issues first”.

• Bazerman: Both perspectives offer bad advice.– Starting with the easy bits might increase the

likelihood of a later impasse– Starting with the toughest issues may bring a

breakdown.

Bazerman: The mythical fixed pie encourages actors to think about issues one at a time. Unfortunately, once an issue has been “resolved”, it is rarely resurrected to create a tradeoff with an issue raised later.

Thinking simultaneously about multiple issues is the best way to create value and break the myth of the fixed pie.

Framing of judgment

• You bought a house in 2001 for $250,000. After the economic downturn (say, we are in late 2010) you have just put it on the market for $299,000, with a real target of $290,000 (your estimate of the true market value). An offer comes in for $280,000.

• Is this offer a $30,000 gain in comparison with the original purchase price? Is this offer a $10,000 loss in comparison with your target?

The answer is “both.”

• What determines whether a negotiator will have a positive or negative frame?

• Negotiators typically think and talk in terms of a certain price (wage etc) they “must” get. They set a high reference point against which gains and losses are measured.

• Thus, a compromise will be viewed as a loss.• The perceived loss leads to a negative frame to

all compromise proposals. A settlement becomes less likely.

• We need to induce concessionary behaviour in the opponent.

• We have to always create an anchor that leads the opposition towards a positive frame. Tell the other side what they could gain.