CHAPTER FIFTEEN
BARGAINING AND NEGOTIATION
OBJECTIVES
1. To identify the economic sources of mutually beneficial agreements — namely,
differences in values.
2. To assess the complications posed by multiple-issue negotiations (and to stress
the value-maximization principle. (Multiple-Issue Negotiations)
3. To explore issues of negotiation strategy: under perfect information and under
imperfect information. (Negotiation Strategy).
TEACHING SUGGESTIONS
I. Introduction and Motivation.
A. Negotiation Examples. Ask students to think about examples of negotiation
in business settings and in everyday life. Here is a possible (partial) list:
Some Negotiation Examples
I. Business.
• Acquiring a Company
• Undertaking a Joint Venture
• Negotiating with a city government
• A labor-management dispute
• Settling a dispute out of court.
• Negotiating for resources within a firm
• Persuading your boss
II. Everyday
• Negotiating a Raise
• Parents “bargaining” with a four-year old about bed time.
• Bargaining with a used-car dealer
• Negotiating a divorce agreement
III. Other
• Log rolling in Congress
• Formulating an international treaty
• Negotiating a multiple-issue procurement contract
II. Teaching the Nuts and Bolts.
Points to Emphasize:
A. A basic understanding of negotiation begins with the notion of the zone of
agreement. The text chapter uses the example of selling a warehouse. For
variety, the instructor might choose a different example: for instance, buying a
used car from its owner or a dealer. After formulating hypothetical reservation
prices, the instructor can show how different prices imply different divisions of
the total profit between the buyer and seller. The point to emphasize here is that
mutually beneficial agreements hinge on differences in values.
B. In multiple-issue negotiations, the principle of value-maximization is crucial. As
stated in the chapter text:
In multiple-issue negotiations, so long as there are differences in the
value (importance) parties place on issues, there will be opportunities for
mutually beneficial agreements of a quid pro quo nature.
It is often said that negotiation is as much about “value creation” as it is about
“value claiming.” Clearly, Pareto efficiency is served (i.e. both sides can be made
better off) if the “pie” is made as large as possible before it has to be
divided. Back-of-the-Chapter Problems 4-8 illustrate this principle. A corollary of
the value-maximization principle is:
Adopt a change in an agreement if and only if the additional benefit to
one side (in dollar terms) exceeds the cost to the other.
Under this condition, the new agreement will necessarily have a greater total value
than the old agreement (allowing the gainer to compensate the loser for the
change).
C. The following “parables” show how creative thinking can increase total value:
a. Two sisters are arguing over who is to have the last orange in the
refrigerator. A poor way to “resolve” the dispute is to have it end in a tug of
war that reduces the orange to pulp. A better way is simply to slice the
orange down the middle. The best solution is to “trade” on differences in the
sisters’ preferences. The older sister is about to make a cake for which she
only needs the peel; the younger sister is interested in eating the fruit. The
simple expedient of peeling the orange accommodates both their needs.
b. Two brothers are quarreling in their family room. One wants the window
open; the other wants it closed. They argue about how far it should be open:
halfway, a crack, more than halfway. There is no solution. Finally, a parent
enters the room and asks the first brother why he wants it open. To get some
fresh air. Why does the other want it closed? To avoid a draft. One solution:
to open the window in the next room, bringing in fresh air without a draft.
(Or have the first brother fetch a sweater for the other.)
Both parables show that crafting mutually beneficial agreements requires the
parties to examine their intrinsic interests and find ways to increase total value.
Agreements are not served by staking out immovable positions.
ADDITIONAL MATERIALS
I. Books on Negotiation
R. Fisher, W. Ury, and B. Patton, Getting to Yes, Penguin Books, 3rd Ed., 2011.
T. C. Schelling, The Strategy of Conflict, Harvard University Press, 1990.
H. Raiffa, The Art and Science of Negotiation, Harvard University Press, 1982.
II. Short Readings
The Harvard Law School’s Program on Negotiation provides cogent, short
summaries of negotiation issues in the news. Visit the website at:
http://www.pon.harvard.edu to subscribe.
T. S. Bernard, “Moving Past Gender Barriers to Negotiate a Raise,” The New York
Times, March 25, 2014, p. F2.
D. Gelles, “In Matter of Weeks, Meeting of Minds on Cable Deal,” The New York
Times, February 14, 2014, pp. B1, B9.
S. Greenhouse “Labor Battle at Kellogg Plant in Memphis Drags On,” The New
York Times, February 11, 2014, pp. B1, B5.
R. H. Thaler, “The Art of Bargaining, So Lost upon Washington,” The New York
Times, January 8, 2012, p. BU4.
T. S. Bernard, “How to Make the Case for Higher Pay,” The New York Times,
November 26, 2011, p. B1, B5.
K. Clark, “NBA Talks Collapse, Head to Court,” The Wall Street Journal,
November 15, 2011, pp. B1, B2.
M. Dolan, “UAW Shifts Stance on Pay Increases,” The Wall Street Journal,
June 10, 2011, pp. B1, B4.
M. Futterman, “The NFL’s $1 Billion Game of Chicken,” The Wall Street Journal,
February 17, 2011, p. D7.
K. O’Brien, “The Closer,” The Boston Globe Magazine, April 12, 2009, pp. 22-25.
(This article discusses the role of mediation.)
J. Lublin, “How to Handle the Job Offer You Can’t Afford,” The Wall Street
Journal, December 2, 2008, pp. B9, B12.
J. D. Glater, “Study Finds Settling is Better than Going to Trial,” The New York
Times, August 8, 2008.
R. Leiber, “Negotiating for a House? Start with ‘Dear Seller’,” The New York Times,
June 2, 2008, pp. B1, B6.
L. Prevost, “When Low Offers Start to Pay Off,” The Wall Street Journal, March 16,
2008, p. BU17.
J. Surowiecki, “Striking Out,” The New Yorker, November 19, 2007, p. 42.
Joe Lapointe, “NHL Cancels the Rest of Its Season as Labor Talks Fall Apart,” The
New York Times, February 17, 2005, p. C1.
“Asbestos Factions Struggle to Settle Their 30-Year War,” The Wall Street
Journal, October 15, 2003, p. A1.
“In a Negotiation Sea, Are you a Carp or a Shark?” New York Times, October 10,
2003, p. BU9.
M. Murray et al, “GE’s Jack Welch Meets his Match in Divorce Court,” The Wall
Street Journal, November 27, 2002, p. A1.
“A Letterman Deal with ABC was Just a Signature Away,” New York Times, March
18, 2002, p. C1.
“Ever Hear the One About the Lawyers and Window Bars?” The Wall Street
Journal, March 23, 1994, p. A1 (How a $909 dispute generated $100,000 in legal
fees.)
III. Longer Readings
J. K. Sebenius, “Six Habits of Merely Effective Negotiators,” Harvard Business
Review, April 2001, pp. 87-95.
M. H. Bazerman and J. R. Gillespie, “Betting on the Future: The Value of
Contingent Contracts,” Harvard Business Review, September-October 1999, pp.
155-160.
IV. Cases
C. K. Claridge, Inc., (9-910-045), Harvard Business School, 2010.
Name Your Price: Compensation Negotiation at Whole Health Management (A
and B), (9-908-064 and 9-908-065), Harvard Business School, 2008.
The Pacific Sentinel (9-903-133 and 9-903-136) Harvard Business School, 2004.
Jessie Jumpshot (A1, B1, B2, B3) (9-800-388, 9-801-251, 9-801-252, and
9-801-253), Harvard Business School, 2001. (This is a 3-player contract
negotiation.
Alphexo Corp. (9-801-418) and Bentonn Corp. 9-801-419), Harvard Business
School, 2000.
Atlantis-Biovent Negotiation, (9-801-262 and 9-801-263), Harvard Business
School, 2000.
Michael Brown: Negotiating Slots at Foxwoods (A) and (B), (9-899-234 and
9-899-235), Harvard Business School, 1999.
Doyle’s Deal Making Dilemma: Negotiating the Job Search, (9-801-124), Harvard
Business School, 1999.
3M: Negotiating Air Pollution Credits, Parts A, B, and C: (9-897-134,
9-897-135, and 9-897-136), Harvard Business School, 1998.
Discount and Hawkins (9-898-130, 9-898-131), Harvard Business School, 1997.
(Negotiation exercise between landlord and tenant.)
Automated Intelligence Corporation (9-898-045), Harvard Business School, 1997.
Precision Controls, Inc. (9-898-046), Harvard Business School, 1997. (This and
the previous case describe a merger negotiation.)
Negotiating Corporate Change (9-897-057, 9-897-058, 9-897-059, and
9-897-060), Harvard Business School, 1997.
(This is role-playing exercise with student negotiators.)
The Baseball Strike (9-796-059), Harvard Business School, 1997.
V. Quips and Quotes
Honesty is the best policy. There is much less competition.
You don’t know a woman until you have met her in court. (Norman Mailer)
Do not do unto others as you would that they do unto you. Their tastes may not be
the same. (George Bernard Shaw)
To study the strategy of conflict is to take the view that most conflict situations are
essentially bargaining situations. They are situations in which the ability of one
participant to gain his ends is dependent to an important degree on the choices or
decisions that the other participant will make. The bargaining may be explicit, as
when one offers a concession; or it may be tacit. It may involve ordinary haggling
in the market place; or it may involve threats of damage, including mutual damage,
as in a strike, boycott, or price war, or in extortion. (Thomas Schelling, The
Strategy of Conflict)
If you don’t go to other men’s funerals, they won’t go to yours.
When negotiating for money, pay attention to the increments of your opponent’s
concessions. When they get progressively smaller, your opponent is reaching his
bargaining limit.
The most important thing in acting is honesty. Once you’ve learned to fake that,
you’ve got it made. (Sam Goldwyn)
I wouldn’t want to belong to any country club that would have me for a member.
(Groucho Marx)