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Outline. Two party distributive negotiations (Win/Lose) Case history Basic Problem Definition Class exercise – known distributions Equilibrium demonstration Uncertainty Time Auctions. Case history - Elmtree House. If you were the Mrs. Peters what would you have done?

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Outline

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  1. Outline • Two party distributive negotiations (Win/Lose) • Case history • Basic Problem Definition • Class exercise – known distributions • Equilibrium demonstration • Uncertainty • Time • Auctions

  2. Case history - Elmtree House • If you were the Mrs. Peters what would you have done? • What advice would you have given Steve about approaching the potential buyer? • Where should Steve hold the talks? • Do you think both parties were satisfied with the outcome?

  3. Reserve Value Distribution

  4. Basic Problem Definition • Distributive allocation • Two bargainers(buyer/seller) – make a joint decision which is enforceable • Single deal • Ignore the effects of time • The alternative is the status quo • Each has a predetermined alternative to a settlement

  5. Basic Problem Definition - continued • Reservation Prices: • s : minimum the seller is willing to settle for • b : maximum the buyer is willing to pay • X* : final contract value (if any) • X* - s : Seller’s surplus • b – X*: Buyer’s surplus • In general these are unknown to each other (one is known – one’s own, and the other is a random variable) • Reservation prices generally do not become public • The more they lie, the more it pays to be honest and vice versa

  6. Zone of Possible Agreement

  7. Input • In the box 9.1 “Select the best candidate”, there is another approach to proof the solution. You can see it in the book “Introduction to Probability Models, Eight edition, Sheldon M. Ross” on Page 123-125. For those of you who are interested in probability, you might be interested in ISE538, stochastic process, instructed by Prof. Ross. • In the sequential decision problem, let’s assume it is a real-world problem. If I were the seller of the house, • I would set 130% of my RP for the first half of the month. • I would set the first half average of buyer’s offer that is higher than my RP to be my RP for the second half. • Anyone who breaks my desirability first gets my house. • However, my RP have to be reasonable in the market. I add my desirability value to the monetary value on the first half, so the percentage should be changed time by time. • TN (that’s assuming you are in a sellers market!! GPB)

  8. Class exercise – known distributions • This exercise involves negotiation between a buyer and a seller • (e.g. the buyer is a program manager and the seller is the controller, this could also be about completion dates between customer and provider) • The reservation price distributions are known to both. • In this case they are uniformly distributed (every value in the range has equal probability) • Buyer $100 to $200 • Seller $50 to $150 • This means there is a 87.5% chance of being able to come to an agreement (See next page)

  9. Class exercise – known distributions • ZOPA – Zone of possible agreement – overlap of the ranges of the buyer’s and seller’s reservation values

  10. Equilibrium demonstration

  11. Equilibrium demonstration - continued

  12. Uncertainty • Tree diagrams • Cumulative probability distributions • Utility Curves

  13. Cumulative Distribution

  14. Tree Diagram

  15. The effects of time • Timing concessions • Sequential search, select the best candidate • Strike game • Escalation game • Virtual strike

  16. The effects of time • We must choose when to come to an agreement • It requires patience • Sometimes there are deadlines • Self-imposed penalties • Real penalties • Most people are too impatient

  17. The effects of time – Select the best candidate • A series of sequential candidates are presented to the selector • He/She has a choice of either selecting the current candidate or going on to the next one. One cannot go back to a rejected candidate • You can tell which candidates are better • Before discussing the answer, we will play the game in class I will present a series of numbers

  18. The effects of time – Select the best candidate • You have to decide when to select a candidate. Write down your answer. I will continue to show new candidates as long as there are any candidates left. • Class results:

  19. Auctions • Distributive negotiation with 3 or more parties • It is distributive between the auctioneer and an individual bidder • It is competitive among bidders – it gets in the way of the distributive aspect • Open, ascending, outcry (English) • Open, descending, outcry (Dutch) • Sealed bids • High bidders wins, pays second price (Philatelic) • Reciprocal (buy, sell) • Silent Auction

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