Chapter 3

Distributive Bargaining

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
Also commonly known as: A fixed-sum process A zero-sum process Win-lose bargaining Hard bargaining

Why?
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

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

Skill 3.1: Recognize a distributive bargaining situations three key components Skill 3.2: Determine a reservation price Skill 3.3: Use bracketing of the other partys 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

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

Sale of an item Buyer and seller do not know each other Buyer and seller do not expect to have any meaningful future relationship Only issue to be negotiated is the price Goals
Buyer = Minimize the price Seller = Maximize the price

Classic Distributive Bargaining Model

Reservation Price Absolute minimum price that the seller will accept or the absolute maximum price that the buyer is willing to pay s = sellers reservation price (min. price) b = buyers reservation price (max. price) If b > s = Zone of Possible Agreement (ZOPA)
(Bargaining Range or Settlement Range)

Classic Distributive Bargaining Model

0_____s________x________b_______$$
ZOPA

s = sellers reservation price (min. price) b = buyers 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

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?

Getting Distinct Advantage

Getting to know the others reservation price The opening offer Skill of the negotiator (Improvisation)

The Importance of Information

Skilled negotiators utilize information to support their offers or diffuse other offers Three types of information: Relational: Facts, beliefs, and feelings about the relationships between the parties
Example: How can you trust this is your best price?

Substantive: Use of facts, reason, and logic

Example: Our price is based on the banks approval loan limit

The Importance of Information

Procedural: Open discussion of the negotiation process that helps understand and manage the process.
Example: We will engage in discussions after we receive certain information

Opening Offers
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.)

Anchoring = the first number on the table may anchor the entire negotiation
(Common human tendency to rely too heavily on the first piece of information offered (the "anchor") when making decisions.)

Why? People often fixate on it

Opening Offers (cont.)

Three types of opening offers which can anchor the negotiations
Facts Extreme Offer Precedent

Inexperienced negotiators may easily let the opening offer anchor the deal

Bracketing
Defined: The logical process of moving toward a middle point between the opening offers
Example: Sellers listed price = $15,000; buyer desires to pay $13,000, thus opens with $11,000

Thus, a negotiator may bracket the other partys 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

Recognize it: as a tactic, not an insult Label it: Outrageous or Ridiculous Follow up: with your own opening offer anchored by facts, precedent, and other information

Social Norms
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

Social Norms
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?

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 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

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)
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 hell probably never get back to Ireland to paint another

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
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

Personal attacks have become a common tactic dont 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

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
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 Sellers 1st counteroffer = $11,000 (framed by citing the number of hours invested = need norm; similar to three others sold = equity norm) Buyers 1st counteroffer = $9,250

Negotiated Settlement
Sellers 2nd counteroffer = $10,000 ($1,000 concession) Buyers accept Negotiated price = X = $10,000 Sellers gain = $2,500 over buyers opening offer Buyers gain = $2,500 less than sellers listed price

Negotiation Settlement: A Work of Art