1 Business System Analysis & Decision Making - Lecture 11 Zhangxi Lin ISQS 5340 July 2006

2 Chapter 9: Making Rational Decisions in Negotiations Outline of the chapter A Decision-Analytic Approach to Negotiations Claiming Value in Negotiation Creating Value in Negotiation An Extended Example: The Case of El-Tek Integration and Critique

3 A Decision-Analytic Approach to Negotiations Raiffa’s decision-analytic approach to negotiations (1982; 2001). Three key sets of information determine the structure of the negotiation game Each party’s alternative to a negotiated agreement – Best alternative To a Negotiated Agreement (BATNA) Each party’s set of interests The relative importance of each party’s interests Again think about the splitting $5000 game. If both Mark and you are rational and negotiation is allowed, what are the possible outcomes? What is the range of your preference? What is the possibly acceptable split that Mark will likely to accept?

4 Claiming Value in Negotiation MarkYou $5000 $2500$1000 Bargaining Zone $100 A resolvable scenario

5 Claiming Value in Negotiation MarkYou $5000 $2500$1000 No Bargaining Zone $100 A non-resolvable scenario

6 Creating Value in Negotiation The case of the Sinai Peninsula negotiation between Egypt and Israel (p138) Intuitive: behind the facial issue there are some interests for negotiating parties. The purpose of solving the issue is to benefit both sides’ interests. If these interests can be identified, it is possible to find a better way to reach the agreement without worrying too much about the difficult issue.

7 Creating Value in Negotiation A B C D   Utility to Egypt Utility to Israel Desired point But how to reach it?  

8 An Extended Example: The Case of El-Tek The case of El-Tek Selling Z-25 to whom? AD vs. MD AD’s concern: Losing market competitive advantage if the material is sold to a rival company MDAD $12 million $10 million $5 million Bargaining Zone $2 million

9 An Extended Example: The Case of El-Tek Three underlying issues Transfer price AD’s competitor protection El-Tek’s competitor protection El-Tek’s benefit = AD’s benefit + MD’s benefit Reality: without careful coordination and systematical value creating, El-Tek’s benefit may not be optimized. Need to adopt the effective techniques to avoid stalled negotiation caused by needless arguments over conflicting predictions about uncertain future.

10 An Extended Example: The Case of El-Tek Claiming value Creating value by identifying additional issues Creating value through bets Avoid overvaluing Ways in which contingent contracts cam improve the outcomes Bets build on differences to joint value Bets help manage biases Bets diagnose disingenuous parties Bets establish incentives for contractual performance Using risk, temporal, and other differences to create value Gathering information to create value in negotiation Build trust and share information Ask questions Strategically disclose information Make multiple offers simultaneously Search for post-settlement settlements

11 Negotiation with Multiple Criteria Pareto Efficiency and Pareto Frontier An example of negotiation with the exchange of two goods.

12 Pareto efficiency Pareto efficiency, or Pareto optimality, is an important notion in neoclassical economics with broad applications in game theory, engineering and the social sciences. Given a set of alternative allocations and a set of individuals, a movement from one allocation to another that can make at least one individual better off, without making any other individual worse off, is called a Pareto improvement or Pareto optimization. An allocation of resources is Pareto efficient or Pareto optimal when no further Pareto improvements can be made. For a given system, the Pareto Frontier is the set of parameterizations (allocations) that are all Pareto efficient. Finding Pareto Frontiers is particularly useful in engineering.

13 The Exchange of Beer vs. Bread Alice has a half dozen bottles of beer ($1 each bottle) and Bob possesses 6 loaves of bread ($0.8 dollar each). Alice wants some bread and Bob wants some bear. They exchange their possessions. How will this be done?

14 x1 x2 Agent 1’s Indifferent curve with regard to x1 and x2 Alice Beer Bread

15 x2 x1 Agent 2’s Indifferent curve of x1 and x2 Bob Beer Bread (0, 6) (3, 3)

16 Feasible point Initial endowment Infeasible point x1 x2 x1 x2 An Edgeworth Box Diagram Alice Bob Beer Bread