Distributive Bargaining Chapter 3 Distributive Bargaining

Distributive Bargaining 3-2 Distributive Bargaining Defined: “A negotiation method in which two parties strive to divide a fixed pool of resources, each trying to maximize its share of the distribution”

Distributive Bargaining 3-3 Distributive Bargaining Also commonly known as: A “fixed-sum” process A “zero-sum” process “Win-lose” bargaining “Hard bargaining”

Why? 3-4 Because many situations are perceived as single issue – money – and each dollar “gained” by one party is “lost” by the other party Easily identified example: the negotiated sale of a big-ticket item (house, car) between a seller and a buyer

Three Components of a Distributive Bargaining Model 3-5 Three Components of a Distributive Bargaining Model 1. The parties view each other as adversaries 2. The objective of both parties is to maximize their self-interest, or share of “the pie” 3. The parties are only concerned about the content of the current negotiation and act as if they expect no future relationship

Five Negotiation Skills 3-6 Skill 3.1: Recognize a distributive bargaining situation’s three key components Skill 3.2: Determine a reservation price Skill 3.3: Use bracketing of the other party’s offer Skill 3.4: Recognize and use social norms to evaluate offers Skill 3.5: Learn the framing of offers to influence how they are perceived

Chapter Case: Buying a Work of Art 3-7 Successful California artist Chris Comte has a painting titled “Sunday” on display in her studio A vacationing couple from Texas admire the painting one day, and return the next to offer Chris $7,500. The listed price is $12,500 and Chris tells them it is one of her best works Why is this a distributive bargaining situation?

Classic Distributive Bargaining Model 3-8 0_____s________x________b_______$$ s = seller’s reservation price (min. price) b = buyer’s reservation price (max. price) x = negotiated price or final agreement ZOPA = zone of possible agreement = s-b (bargaining range or settlement range)

“The Negotiation Dance” 3-9 Inexperienced negotiators often use the classic distributive bargaining model They start with opening offers and then “dance around” with counteroffers until one near “x” is agreed upon Why is this often NOT a good strategy?

The Importance of Information (cont.) 3-10 The Importance of Information (cont.) Skilled negotiators utilize information to support their offers or diffuse other offers Three types of information: Relational: Focus on relationship between the parties Example: “How can you trust this is your best price?”

The Importance of Information 3-11 The Importance of Information Substantive: Use of facts, reason, and logic Example: “Our price is based on the bank’s approval loan limit” Procedural: Discuss the process Example: “We will engage in discussions after we receive certain information”

Opening Offers The most critical step in negotiations 3-12 The most critical step in negotiations Yet … successful negotiators are split on strategy: Many prefer to make the opening offer while others prefer to receive the opening offer!

Opening Offers (cont.) 3-13 Anchoring = the first number on the table may “anchor” the entire negotiation Why? People often fixate on it

Opening Offers (cont.) 3-14 Three types of opening offers which can anchor the negotiations Facts: “The average price paid in the past year is $350,000” Extreme: “This is the most valuable lot and home in the entire neighborhood!” Precedent: “My last supervisor always gave me the highest rating”

Inexperienced Negotiators 3-15 Inexperienced Negotiators May Easily Let the Opening Offer Anchor the Deal

Bracketing 3-16 Defined: The logical process of moving toward a middle point between the opening offers Example: Seller’s listed price = $15,000; buyer desires to pay $13,000, thus opens with $11,000 Thus, a negotiator may “bracket” the other party’s opening offer by setting their own opening offer the same distance away from the desired value

Two-Party, Single-Issue Negotiation: A Work of Art

“Traps to Avoid” Responses to an “Extreme” Opening Offer 3-18 Recognize it: as a “tactic,” not an insult Label it: “Outrageous” “Ridiculous” Follow up: with your own opening offer anchored by facts, precedent, and other information

Social Norms 3-19 After opening offers, how can parties distribute the possible gain available to both sides? Negotiators often frame their offers by utilizing social norms: Relational: desire to maintain a positive relationship Fairness: four variations Equality: “50-50” or “split the difference” Equity: proportional effort, inputs Need: proportional needs Status quo: keep current situation Reciprocity: respond to the change from a previous offer with an equal change in your next counter Good faith: meet and discuss options; favor offers; use information

Does a Social Norm Provide the “Fairest” Settlement? 3-20 Does a Social Norm Provide the “Fairest” Settlement? “The Consistency Principle”: people need consistency and fairness in the negotiation process The fairness norms may be the most commonly utilized Which settlement values between $7,500 and $12,500 is “fairest”? “best”? “right”?

How Norms May Affect Counteroffers

Counteroffers Framing: a key negotiation skill 3-22 Framing: a key negotiation skill Defined: The wording or context of an offer Why framing is a key skill “While facts and numbers are important, people attach significant meaning to words, which affects their views of a proposal” --Theodore Kheel, The Keys to Conflict Resolution

Tactics for Success: “Wait to Counter” 3-23 When receiving an offer wait a respectful period before responding Why? A quick response implies you did not seriously consider the offer The other party will feel better about the process Gives you time to develop a positive response: “We considered your offer and appreciate the movement on your part. We ask that you seriously consider our counteroffer…”

Four Types of Frames (applied to the Chapter Case) 3-24 Four Types of Frames (applied to the Chapter Case) Reframing: “This work is a solid investment – the only other Ireland piece by this artist just sold at auction for $20,000” Focus framing: “This is the only painting of a lake the artist has done, and he’ll probably never get back to Ireland to paint another”

Four Types of Frames (applied to the Chapter Case) 3-25 Four Types of Frames (applied to the Chapter Case) Contrast framing: “If you pay for it over 24 months, the cost per month is less than the price of four tickets to a first-run play, but you will enjoy the painting for many years” Negative framing: “You can wait to decide – but another couple looked at it earlier today and said they would be back”

Four Types of Frames Applied to Chapter Case

Reframing Offer 3-27 William Ury, Getting Past No, suggests that negotiators never say no or reject an offer instead they reframe by using questions: Ask why: “Why did you select that exact number?” Ask why not: “Why not ask for an estimate from a professional appraiser?” Ask what if: “What if we agree to your price, but you paid for delivery and warranty?” Ask for advice: “How would you suggest I present this offer to my boss when she has rejected that price?”

Reframing Personal Attacks 3-28 Reframing Personal Attacks Personal attacks have become a common tactic –don’t let emotions take over strategy How? Prepare: Expect personal attacks, control your emotions Recognize: The other party needs to “blow off steam” Reframe: Ignore the attack on you, reframe it on the problem Silence: Communicates your displeasure and can be a powerful tool

Final Negotiated Price 3-29 Final Negotiated Price Shaking hands and exchanging a product for money ends many negotiations Contingency contracts should be used if future event may alter the agreement or keep it from being signed

Negotiated Settlement 3-30 Chapter Case “Buying a Work of Art” Opening offers: Buyers = $7,500 Seller =$12,500 Reservation prices: Buyers = $11,000 Seller = $8,000 (ZOPA) = $8,000 - $11,000 Seller’s 1st counteroffer = $11,000 (framed by citing the number of hours invested = need norm; similar to three others sold = equity norm) Buyer’s 1st counteroffer = $9,250

Negotiated Settlement 3-31 Negotiated Settlement Seller’s 2nd counteroffer = $10,000 ($1,000 concession) Buyers accept Negotiated price = X = $10,000 Seller’s gain = $2,500 over buyer’s opening offer Buyers’ gain = $2,500 less than seller’s listed price

Negotiation Settlement: A Work of Art