1. Lecture 3 Negotiating Strategy Professor Keith Chen 1.Quick Review of the Alternating-Offers Model Thinking about the value of the future. 2.BATNA & ZOPA 3.Understanding Preferences & Bargaining Sets 4.Introduction to Axiomatic (Nash) Bargaining

2. Alternating Offers Another Take on Alternating Offers: –Learning to think about the value of the future. Argument that player 1 gets: 1.1/(1+δ) when discount rates are the same 2.(1-δ 2 )/ (1- δ 1 δ 2 ) when discount rates are different Use thinking About Strategic Options to figure this out.

3. Alternating Offers Model Take Away Points: –“Best you can do” often depends on leaving your opponent close to rejecting. “Fall in love with three, not one.” –Understanding the value of the future (the value of negotiations breaking down) to both you and your opponent is key!!!

4. BATNA & ZOPA BATNA –Do you know your opponents? –Does your opponent’s actions tell you anything about theirs or yours? Double sided sword; kidnapping story –They call, waited, tell you how much they have invested –Pitfall: making them hungry, similar to a winners curse? Bull Moose story –Theodore Roosevelt, 1 million posters printed, no photo copyright. –Can you affect yours?

5. BATNA & ZOPA Weighing your BATNA –Identify the best course of action you can take without an agreement with the other party. –Think about the deals in this negotiation that are just as good as this outside option. ZOPA –How is this determined? –Is all of it Pareto? –How do we divide it?

6. Nash Solution John Nash: Born 1928, Wins Nobel Prize 1994

7. Nash Solution Axioms (Assumptions that we’ll use to solve a bargaining problem.) –IIA (Independence of Irrelevant Alternatives) –Pareto Efficiency –Symmetry

8. Nash Solution Axioms (Assumptions that we’ll use to solve a bargaining problem.) –Respects affine transformations –IIA (Independence of Irrelevant Alternatives) –Pareto Efficiency –Symmetry

9. Next Time Readings for Next Time: –Sally Swansong / Prepare to run Monday. –Raiffa Ch. 6, The Role of Time –Neelin, Sonnenschein & Spiegel: A Further Test of Noncooperative Bargaining Theory –Kahneman, Knetsch & Thaler: Fairness as a Constraint on Profit Seeking –Bohnet & Zeckhauser: Social Comparisons in Ultimatum Bargaining