1. Introduction to Negotiations Tim Smith BBE 3503

2. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products Characteristics of Negotiations There are four characteristics common to all negotiation situations (Raiffa et al. 2002, Lewicki 1992, Rubin & Brown 1975): 1.there are two or more parties 2.the parties can cooperate to arrive at a joint decision 3.the payoffs to any party depend either on the consequences of the joint decision or alternatives external to the negotiations 4.the parties can reciprocally and directly exchange information “a process of joint decision-making where two or more parties communicate to select and commit to a common course of action that is superior to unilateral alternatives.”

3. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products Conventional Negotiations Focus on winning Assert positions/personal preferences Concede stubbornly Seek compromises based on arbitrary divisions (e.g. split the difference) Engage in threats, bluffs or other negotiation tactics Conventional Tactics Good cop/bad cop Highball/lowball Bluff Threats Nibble Appeals to ‘reason’

4. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products Negotiation Analysis Systematic art and science of Negotiation Theoretical underpinnings: Game theory Decision analysis Behavioral decision analysis Negotiation analysis seeks to synthesize contributions from all of these three fields.

5. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products Interest-Based Negotiations* Separate the people from the problem Focus on interests, not positions Invent options for mutual gain Insist on objective criteria “Yes” implies cooperation! *Roger Fisher & William Ury. 1991. Getting to Yes. 2 nd ed. New York: Penguin.

6. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products Prisoners Dilemma The Prisoners Dilemma is a longstanding ‘game’ from game theory that demonstrates human behavior under certain conditions. The purpose of the Prisoners Dilemma is to demonstrate that people acting in their own self-interest does not always result in the optimal outcome. Important thing is that there are external costs of the players decisions that are borne (carried) by others. A Beautiful Mind, the Nash EquilibriumNash Equilibrium

7. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products Prisoners Dilemma

8. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products General Structure Where h > c > d > l Any payoffs of this form are a prisoners’ dilemma game Player 2 DefectCooperate Player 1 Defect d,dh,l Cooperate l,hc,c

9. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products Examples Roommate Example Two flatmates share a flat and neither likes cleaning. Both prefer the outcome where both put effort into cleaning to the outcome where no one does cleaning, but each prefers that the other did the cleaning while she herself did not. Not cleaning is a dominant strategy for both and the worst outcome arises: no one does any cleaning. Price Competition Example Two identical firms competing in prices. If both set high prices they share the market and the price is high, so both make large profits. But given that the other firm prices high, either firm can make an even larger profit by pricing low (undercutting) and capturing the whole market. Both firms have a dominant strategy of pricing low, and the NE is for both to price low and both make low profits.

10. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products The Point of the Prisoners’ Dilemma Game The players could achieve a good outcome for both if they cooperated. But, if each acts in their own self-interest then the worst outcome is the Nash equilibrium. Look at ways that cooperation may arise as an equilibrium of the game: –Repetition –Penalties and rewards –Leadership Repetition involves repeating the prisoners’ dilemma game more than once Penalties and rewards or Leadership involve changing the payoffs of the players In some sense repetition is a more satisfying explanation of how cooperation can arise, because if we change the payoffs then the game isn’t a prisoners’ dilemma any more!

11. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products Basic Concepts Target Point – Your preferred settlement, taking into account limits imposed by the interests of your counterpart – Your target is likely to change as negotiations unfold BATNA or Reservation Point – Walk away point at which you are indifferent between settlement and walking away Reason backward to determine BATNA: Brainstorm alternatives to determine what your best alternative to what no agreement really is Base it on facts not wishes Do NOT change your BATNA unless the facts change Do NOT allow others to talk you into change

12. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products A BATNA

13. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products Basic Concepts Bargaining Zone--the region between parties’ reservation points Positive when parties’ reservation points overlap and doesn’t exist when there is no overlap Agreement is possible when bargaining zones are positive and not possible when there is no reservation point overlap Bargaining Surplus – The amount of overlap produced by reservation points – A measure of the size of the bargaining zone

14. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products ZOPA in Distributive Negotiations

15. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products Understand the interests of your negotiating counterpart(s) Interests are self-evident in formal zero-sum games Interests of your negotiating counterparts are NOT self-evident in multiple issue negotiations where each party possesses private information –In particular, information about your counterparts’ BATNA’s are often revealed only through the dynamics of negotiation

16. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products Prepare, Prepare, Prepare! 1.Determine your BATNA. –It is your most important source of POWER! 2.Improve your BATNA. –It is never as good as we would like –A really good BATNA ensures a good chance of a large share of the surplus –Search out possible alternatives that may enhance your ‘walk away’ point 3.Determine your opening offer before you begin negotiations 4.Do the best you can to determine your negotiating counterpart’s BATNA: –Craft a dialogue that engenders much information exchange –In mixed motive negotiations work on creating value before claiming it

17. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products Summary of Negotiation Analysis (Sum-plus Games)

18. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products BIG Questions Reveal your reservation price? –No! Unless it is very,very good. Seldom the case Lie about your reservation price? –No! You can back yourself into a corner and fail to reach agreement Try to convince your counterpart that her BATNA is no good? –Probably Not. Only if you have supportable evidence that it is really no good –Beware of a Boomerang effect: people often do the opposite of what you want them to do Tough or Soft? –Neither: too tough may blow the deal; too soft, you give away your bargaining surplus –Try to make an offer in the bargaining zone, not outside –IF you are certain of your counterpart’s BATNA, offer just slightly better

19. BP 3503-5503: MARKETING BIO-BASED PRODUCTS © T. M. Smith, 2005 | UNIVERSITY OF MINNESOTA, Department of Bio-based Products BIG Questions ANCHORING –People make estimates by starting from an initial value and adjusting to provide a final answer. –The initial value is a psychological anchor –Fact: adjustment is almost always insufficient Too high, the estimate tends to be too high; too low, the estimate tends to be too low –Irrelevant info can serve as anchors influencing perceptions of the bargaining zone: Real estate agents are given information including a “list price” along with the actual appraised price. 81% of agents said they did not use list price to estimate sales price Nevertheless, manipulating the “list price” by 12% resulted in a significant difference in agents’ estimates of the property’s sales price The average price with a low list price was 15% lower than that for the high list price anchor –First Offers as Anchors: Does making the first offer lead to a better outcome for you? Yes, if you are certain of your counterpart’s BATNA; not necessarily if you are uncertain