Strategy and Tactics of Distributive Bargaining

Negotiation is an interpersonal decision-making process by which two or more people agree how to allocate scarce resources Two Main Types of Negotiation: Adversarial (Win-Lose): Negotiation is a contest. Each side pursues its own interests – at the expense of the other, if necessary. Cooperative (Win-Win): Negotiation is a collaboration. Both sides work together for mutual satisfaction.

Distributive Bargaining: Slicing the Pie also known as competitive, adversarial, or win-lose bargaining the goals of one party are usually in fundamental and direct conflict with the goals of the other party resources are fixed & limited, and both parties want to maximize their share of the resources one party tries to give information to the other party only when it provides a strategic advantage

negotiation power depends on the information one can gather about the other party negotiating parties focus much on their differences that they ignore what they have in common 3 Reasons to Understand Distributive Bargaining:- See Board 3 Situations When Distributive Bargaining is Effective: See Board

The Distributive Bargaining Situation Preparation—set a Target point, aspiration point Walkaway, resistance point Asking price, initial offer

The Role of Alternatives to a Negotiated Agreement Alternatives give the negotiator power to walk away from the negotiation If alternatives are attractive, negotiators can: Set their goals higher Make fewer concessions If there are no attractive alternatives: Negotiators have much less bargaining power BATNA –Best alternative to a negotiated agreement

Basic Concepts Target Point – the point at which a negotiator would like to conclude negotiations; his optimal goal or aspiration Buyer’s Target Point (BT) – the optimal (lowest) price buyers would like to pay Seller’s Target Point (ST) – the optimal (highest) price sellers would like to set

Resistance (or Reservation) Point – the negotiator’s bottom line Buyer’s Resistance Point (BR) –the highest price buyers are willing to pay Seller’s Resistance Point (SR) – the lowest price sellers are willing to set

Asking Price – the initial price set by the seller; seller’s opening bid Initial Offer – the first price that the buyer will quote to the seller; buyer’s opening bid Settlement Point – the price that both buyer and seller will agree upon

Bargaining Range – the spread between the resistance points; a. k. a Bargaining Range – the spread between the resistance points; a.k.a. settlement range or zone of potential agreement Bargaining Range Absolute Value – the difference between the buyer’s & seller’s resistance points

Positive Bargaining Range – when the buyer’s resistance point is above the seller’s; negotiation is possible Buyer’s Bargaining Range Seller’s Bargaining Range Positive Bargaining Zone Buyer’s Target Point (BT) Seller’s Resistance Point (SR) Seller’s Target Point (ST) Buyer’s Resistance Point (BR)

Negative Bargaining Range – when the seller’s resistance point is above the buyer’s; negotiation is impossible Buyer’s Bargaining Range Seller’s Bargaining Range Negative Bargaining Zone Buyer’s Target Point (BT) Buyer’s Resistance Point (BR) Seller’s Target Point (ST) Seller’s Resistance Point (SR)

Negotiator’s Surplus – the positive difference between the settlement point and the negotiator’s resistance point Buyer’s Bargaining Range Seller’s Bargaining Range Seller’s Surplus BT SR ST BR Settlement Point Buyer’s Surplus

Illustrative Case: Larry and Monica Larry wanted to move closer to where he works. After some time, he found a house that met his requirements. The seller, Monica, set the asking price at $145,000, which was $10,000 above what Larry hoped to pay but $5,000 below the most he would be willing to pay. Larry knew that the more he paid for the house, the less he would be able to make some very desirable alterations, buy draperies and some new furniture, and hire a moving company.

Monica already had attractive drapes in the house Monica already had attractive drapes in the house. She was moving to a new house; if she could not use the drapes in the new house, Larry might be able to purchase them or ask Monica to include them with the sale. The same might be true for several rugs, hall tables and other items. Note: Assume further that the seller’s resistance point is 20% below the asking price

Identify the following elements: Larry’s target point Larry’s resistance point Monica’s asking price Monica’s resistance point Bargaining range Bargaining range absolute value Settlement point (seller’s surplus is 65%) Settlement point (buyer’s surplus is 90%)

Answers: Larry’s target point: $135,000 Monica’s asking price, $145,000, was $10,000 above what Larry hoped to pay: $145,000 - $10,000 = $135,000 2. Larry’s resistance point: $150,000 Monica’s asking price, $145,000, was $5,000 below the most Larry would be willing to pay: $145,000 + $5,000 = $150,000

3. Monica’s asking price: $145,000 Monica’s asking price was already explicitly stated in the case 4. Monica’s resistance point: $116,000 The seller’s resistance point was assumed to be 20% below the seller’s asking price: ($145,000)(0.20) = $29,000 $145,000 - $29,000 = $116,000

5. Bargaining range: $116,000 - $150,000 This is simply the spread between the buyer’s and seller’s resistance points 6. Bargaining range absolute value: $34,000 The difference between the buyer’s & seller’s resistance points: $150,000 - $116,000 = $34,000

7. Settlement point (if the seller’s surplus is 65%): $138,100 The difference between the buyer’s & seller’s resistance points (bargaining range absolute value): $150,000 - $116,000 = $34,000 Seller’s surplus is 65% of the bargaining range absolute value: ($34,000)(0.65) = $22,100 Settlement point (SR + seller’s surplus): $116,000 + $22,100 = $138,100

Buyer’s Bargaining Range Seller’s Bargaining Range Seller’s Surplus (65%) BT SR ST BR Settlement Point Buyer’s Surplus $116,000 $150,000 $138,100 $22,100 $34,000

8. Settlement point (if the buyer’s surplus is 90%): $119,400 The difference between the buyer’s & seller’s resistance points (bargaining range absolute value): $150,000 - $116,000 = $34,000 Buyer’s surplus is 90% of the bargaining range absolute value: ($34,000)(0.90) = $30,600 Settlement point (BR - buyer’s surplus): $150,000 - $30,600 = $119,400

Buyer’s Bargaining Range Seller’s Bargaining Range Seller’s Surplus BT SR ST BR Settlement Point Buyer’s Surplus (90%) $116,000 $150,000 $119,400 $30,600 $34,000

Fundamental Strategies Push for settlement near opponent’s resistance point Get the other party to change their resistance point If settlement range is negative, either: -Get the other side to change their resistance point -Modify your own resistance point Convince the other party that the settlement is the best possible

Keys to the Strategies The keys to implementing any of the four strategies are: Discovering the other party’s resistance point Influencing the other party’s resistance point

Manage the other party’s impressions 4 Tactical Tasks relating to targets, resistance points and costs of terminating negotiations Assess other party’s Target, Resistance Point and the costs of termination for the other party Manage the other party’s impressions Modify the other party’s perceptions Manipulate the actual costs of delay or termination

1/ Assess Outcome Values and the Costs of Termination for the Other Party Indirectly Determine information opponent used to set: Target Resistance points Directly Opponent reveals the information

2/ Manage the Other Party’s Impressions Screen your behavior: Say and do as little as possible Direct action to alter impressions Present facts that enhance one’s position

3/ Modify the Other Party’s Perceptions Make outcomes appear less attractive Make the cost of obtaining goals appear higher Make demands and positions appear more or less attractive to the other party –whichever suits your needs

4/ Manipulate the Actual Costs of Delay or Termination Plan disruptive action Raise the costs of delay to the other party Form an alliance with outsiders Involve (or threaten to involve) other parties who can influence the outcome in your favor Schedule manipulations One party is usually more vulnerable to delaying than the other

Positions Taken During Negotiation: Opening Offer Opening Stance Initial & Subsequent Concessions Final Offer

Guidelines for Making Concessions: Give yourself enough room to make concessions. Try to get the other party to start revealing their needs and objectives first. Be the first to concede on a minor issue but not the first to concede on a major issue. Make unimportant concessions and portray them as more valuable than they are.

Make the other party work hard for every concession you make. Use trade-offs to obtain something for every concession you make. Generally, concede slowly and give a little with each concession. Do not reveal your deadline to the other party. Occasionally say “no” to the other negotiator.

Be careful trying to take back concessions even in “tentative” negotiations. Keep a record of concessions made in the negotiation to try to identify a pattern. Do not concede “too often, too soon, or too much.”

Establishing a Commitment: Public Pronouncement Linking with an Outside Base Increase the Prominence of Demands Reinforce the Threat or Promise

Closing the Deal: Provide Alternatives Assume the Close Split the Difference Exploding Offers Sweeteners

Hardball Tactics – designed to pressure negotiators to do things they would not otherwise do; work best against poorly-prepared negotiators Dealing with Hardball Tactics: Ignore Them Discuss Them Respond in Kind Co-opt the Other Party

Typical Hardball Tactics: Good Cop/Bad Cop Lowball/Highball Bogey The Nibble Chicken Intimidation Aggressive Behavior Snow Job

Summary Negotiators need to: Set a clear target and resistance points Understand and work to improve their BATNA Start with good opening offer Make appropriate concessions Manage the commitment process