Strategy and Tactics of Distributive Bargaining

1. Strategy and Tactics of Distributive Bargaining

2. Distributive Bargaining: Slicing the Pie • also known as competitive, adversarial, or win-lose bargaining • the goals of one party are usually in fundamental and direct conflict with the goals of the other party • resources are fixed & limited, and both parties want to maximize their share of the resources

3. one party tries to give information to the other party only when it provides a strategic advantage • negotiation power depends on the information one can gather about the other party • negotiating parties focus much on their differences that they ignore what they have in common

4. Basic Concepts Target Point – the point at which a negotiator would like to conclude negotiations; his optimal goal or aspiration Buyer’s Target Point (BT) – the optimal (lowest) price buyers would like to pay Seller’s Target Point (ST) – the optimal (highest) price sellers would like to set

5. Resistance (or Reservation) Point – the negotiator’s bottom line Buyer’s Resistance Point (BR) –the highest price buyers are willing to pay Seller’s Resistance Point (SR) – the lowest price sellers are willing to set

6. Asking Price – the initial price set by the seller; seller’s opening bid Initial Offer – the first price that the buyer will quote to the seller; buyer’s opening bid Settlement Point – the price that both buyer and seller will agree upon

7. Bargaining Range – the spread between the resistance points; a.k.a. settlement range or zone of potential agreement Bargaining Range Absolute Value – the difference between the buyer’s & seller’s resistance points

8. Positive Bargaining Zone Buyer’s Bargaining Range Seller’s Bargaining Range Seller’s Target Point (ST) Buyer’s Resistance Point (BR) Seller’s Resistance Point (SR) Buyer’s Target Point (BT) Positive Bargaining Range – when the buyer’s resistance point is above the seller’s; negotiation is possible

9. Negative Bargaining Zone Buyer’s Bargaining Range Seller’s Bargaining Range Seller’s Target Point (ST) Seller’s Resistance Point (SR) Buyer’s Resistance Point (BR) Buyer’s Target Point (BT) Negative Bargaining Range – when the seller’s resistance point is above the buyer’s; negotiation is impossible

10. Seller’s Surplus Buyer’s Surplus Buyer’s Bargaining Range Seller’s Bargaining Range BT SR Settlement Point BR ST Negotiator’s Surplus – the positive difference between the settlement point and the negotiator’s resistance point

11. Illustrative Case: Larry and Monica Larry wanted to move closer to where he works. After some time, he found a house that met his requirements. The seller, Monica, set the asking price at $145,000, which was $10,000 above what Larry hoped to pay but $5,000 below the most he would be willing to pay. Larry knew that the more he paid for the house, the less he would be able to make some very desirable alterations, buy draperies and some new furniture, and hire a moving company.

12. Monica already had attractive drapes in the house. She was moving to a new house; if she could not use the drapes in the new house, Larry might be able to purchase them or ask Monica to include them with the sale. The same might be true for several rugs, hall tables and other items. Note: Assume further that the seller’s resistance point is 20% below the asking price

13. Identify the following elements: • Larry’s target point • Larry’s resistance point • Monica’s asking price • Monica’s resistance point • Bargaining range • Bargaining range absolute value • Settlement point (seller’s surplus is 65%) • Settlement point (buyer’s surplus is 90%)

14. Answers: • Larry’s target point: $135,000 • Monica’s asking price, $145,000, was $10,000 above what Larry hoped to pay: • $145,000 - $10,000 = $135,000 • 2.Larry’s resistance point: $150,000 • Monica’s asking price, $145,000, was $5,000 below the most Larry would be willing to pay: • $145,000 + $5,000 = $150,000

15. 3. Monica’s asking price: $145,000 Monica’s asking price was already explicitly stated in the case 4. Monica’s resistance point: $116,000 The seller’s resistance point was assumed to be 20% below the seller’s asking price: ($145,000)(0.20) = $29,000 $145,000 - $29,000 = $116,000

16. 5. Bargaining range: $116,000 - $150,000 This is simply the spread between the buyer’s and seller’s resistance points 6. Bargaining range absolute value: $34,000 The difference between the buyer’s & seller’s resistance points: $150,000 - $116,000 = $34,000

17. 7. Settlement point (if the seller’s surplus is 65%): $138,100 The difference between the buyer’s & seller’s resistance points (bargaining range absolute value): $150,000 - $116,000 = $34,000 Seller’s surplus is 65% of the bargaining range absolute value: ($34,000)(0.65) = $22,100 Settlement point (SR + seller’s surplus): $116,000 + $22,100 = $138,100

18. Seller’s Surplus (65%) Buyer’s Surplus Buyer’s Bargaining Range Seller’s Bargaining Range $22,100 BT SR Settlement Point BR ST $116,000 $138,100 $150,000 $34,000

19. 8. Settlement point (if the buyer’s surplus is 90%): $119,400 The difference between the buyer’s & seller’s resistance points (bargaining range absolute value): $150,000 - $116,000 = $34,000 Buyer’s surplus is 90% of the bargaining range absolute value: ($34,000)(0.90) = $30,600 Settlement point (BR - buyer’s surplus): $150,000 - $30,600 = $119,400

20. Buyer’s Surplus (90%) Seller’s Surplus Buyer’s Bargaining Range Seller’s Bargaining Range $30,600 BT SR Settlement Point BR ST $116,000 $119,400 $150,000 $34,000

21. Fundamental Strategies: I. Push for a settlement close to the other party’s resistance point II. Influence the other party to change its resistance point III. Convert a negative settlement range into a positive settlement range IV. Convince the other party that your suggested settlement point is the best possible deal BOTTOMLINE: discover and influence the other party’s resistance point

22. Positions Taken During Negotiation: • Opening Offer • Opening Stance • Initial & Subsequent Concessions • Final Offer

23. Guidelines for Making Concessions: • Give yourself enough room to make concessions. • Try to get the other party to start revealing their needs and objectives first. • Be the first to concede on a minor issue but not the first to concede on a major issue. • Make unimportant concessions and portray them as more valuable than they are.

24. Make the other party work hard for every concession you make. • Use trade-offs to obtain something for every concession you make. • Generally, concede slowly and give a little with each concession. • Do not reveal your deadline to the other party. • Occasionally say “no” to the other negotiator.

25. Be careful trying to take back concessions even in “tentative” negotiations. • Keep a record of concessions made in the negotiation to try to identify a pattern. • Do not concede “too often, too soon, or too much.”

26. Establishing a Commitment: • Public Pronouncement • Linking with an Outside Base • Increase the Prominence of Demands • Reinforce the Threat or Promise

27. Closing the Deal: • Provide Alternatives • Assume the Close • Split the Difference • Exploding Offers • Sweeteners

28. Hardball Tactics – designed to pressure negotiators to do things they would not otherwise do; work best against poorly-prepared negotiators • Dealing with Hardball Tactics: • Ignore Them • Discuss Them • Respond in Kind • Co-opt the Other Party

29. Typical Hardball Tactics: • Good Cop/Bad Cop • Lowball/Highball • Bogey • The Nibble • Chicken • Intimidation • Aggressive Behavior • Snow Job