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«3 Chapter Distributive Bargaining T he negotiation model known today as distributive bargaining was first identified by R. E. Walton and R. B. ...»

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3

Chapter

Distributive Bargaining

T he negotiation model known today as distributive bargaining was first

identified by R. E. Walton and R. B. McKersie in their seminal work on

negotiation theory, A Behavioral Theory of Labour Negotiations.1 In their

work they defined the differences between distributive bargaining and

integrative bargaining in the field of labor–management relations.

(Integrative bargaining will be discussed in Chapter 4.) Today both terms

are commonly used in all discussions of negotiation theories and processes. Distributive bargaining is a negotiation method in which two parties strive to divide a fixed pool of resources, often money, each party trying to maximize its share of the distribution. Distributive bargaining is a fixed-sum game, and the limited resource is often termed a fixed pie. It is also called a zero-sum process because one party loses whatever amount is gained by the other. For example, if a seller is paid $1,000 (and thus realizes a $1,000 gain), then a buyer has paid the same amount (and realizes a $1,000 loss)—and the sum of the two is zero. Distributive bargaining is described as win-lose bargaining because whatever one side gains comes at the expense of the other party—what is “won” by one is “lost” by the other. It is also sometimes referred to as hard bargaining because it is usually a highly competitive process designed to reach a formal written agreement, such as a purchase contract. Probably the most easily identified example of distributive bargaining would be the sale or purchase of a big-ticket item such as a house or a car.2 The general nature of distributive bargaining is highly competitive and the objective of the parties involved is to maximize their share of the fixed resource. As a result, both parties may use a variety of tactics including making threats, concealing their true objectives, misrepresenting information—or even lying and utilizing leverage or power if they perceive it is balanced in their favor. A common example in labor relations would be a union threatening to strike when it perceives that management cannot afford the loss of production.

Why is it necessary for all negotiators to be prepared to use and/or respond to distributive bargaining tactics? The basic reason is that, for many novice as well as some experienced negotiators, distributive bargaining is the heart of negotiation. For them, the word negotiation brings to mind the classic car-buying situation: a single-deal negotiation in which only one issue (price) is key, and both sides view the transaction as a zero-sum game. Thus, many negotiators will view any situation as distributive and therefore will use distributive strategies and tactics, even though it may not best serve their long-term interests.

In general, the distributive bargaining model is identified by three components: (1) the parties involved view each other as adversaries; (2) the objective of both parties is to maximize their self-interest or their “share of the pie”; and (3) they are only concerned about the current negotiation, interacting with each other as though they have no past relationship and expect no future relationship—and thus are willing to use tactics they might not use if they had a continuing relationship.3 It is important to recognize, however, that sometimes the parties do have a past and a future relationship—as in labor–management contract negotiations—but they use the distributive model in spite of this fact and bargain strictly as adversaries, trying to get a maximum “share of the pie,” seemingly unmindful that in later months or years they may suffer from the retaliatory tactics of the other party, who has been waiting to “even the score.” Negotiation Skills In this chapter we present five negotiation skills that can be learned and developed by the novice negotiator, and applied to the end-ofchapter Learning Exercise, “Buying a House.” Skill 3.1 Recognize a distributive bargaining situation by the three key components and therefore prepare to utilize appropriate strategies and tactics to reach a desired settlement.

Skill 3.2 Begin by determining a reservation price to prevent “the heat of the moment” from causing you to agree to an unacceptable offer.

Skill 3.3 Learn how to use bracketing of the other party’s offer to achieve your desired outcome in a distributive negotiation.

Skill 3.4 Recognize and use common social norms and accepted practices to evaluate offers, make counteroffers, and reach a settlement point.

Skill 3.5 Learn the important role of framing offers to influence how others perceive and respond to offers.

Chapter 3 Distributive Bargaining

CHAPTER CASE: BUYING A WORK OF ART

Chris Comte is an artist with studios in Morro Bay, California, and Cincinnati, Ohio.

She has built a following of admirers in southern California and in Ohio and is considered to be very talented by those who collect her paintings. Many of her works have appeared in magazines such as Southern Living and San Luis Obispo Magazine and have been purchased and displayed in many prominent locations including art galleries, courthouses, and private collections. However, like most struggling artists, she always needs to sell her works for a fair price to pay the bills. One of her favorite (and she believes one of her best) paintings is of two young women dressed in their finest Sunday white outfits, sitting in a rowboat on a sunny, lazy August afternoon, with a beautiful wildflower garden behind them. The painting is simply titled Sunday. A retired couple from Texas is vacationing in the area for a few days and by chance stop in the studio. While browsing they pause to admire Sunday. The next day they decide to return to the studio and possibly buy the painting. The listed price is $12,500. The buyers believe they cannot afford to pay the asking price, and have decided to offer $7,500, knowing that artists often negotiate the price of their works.





It is a classic distributive bargaining situation. The only real issue is price. Both parties would like to make a deal, but both also know they can walk away from the deal.

CLASSIC DISTRIBUTIVE BARGAINING SITUATION

The classic distributive bargaining situation is one that everyone has experienced.

The issue is the sale of a piece of furniture, an automobile, or perhaps, as in the Chapter Case, a work of art. The buyer and seller do not know each other, and do not expect to have any meaningful future relationship. The only issue to be negotiated is price. The goal of the buyer is to minimize the price, and the goal of the seller is to maximize the price. Both view the situation as win-lose bargaining. It is important to consider that in most such distributive bargaining situations, there actually is no “fair” or “best” price. What is a house worth? It’s worth whatever price the two parties will agree upon.

Howard Raiffa, in his classic book The Art and Science of Negotiation, provides an analytical model of this classic distributive bargaining situation. Raiffa explains that when the two parties enter discussion, each has some idea of what they consider to be their reservation price—the absolute minimum price that the seller will accept or the absolute maximum price that the buyer is willing to pay. Let’s call the seller’s reservation price s and the buyer’s reservation price b. What happens if negotiators do not decide their reservation price before the negotiation begins? They will be at a real disadvantage because they may easily agree to what they will later admit to being too much or too little because they were “caught up in the heat of the negotiation.” Unfortunately this is not a rare situation.

The reservation prices can also be thought of as the BATNA of each party, as we discussed in Chapter 2. For sellers, the BATNA or s is the price at which they will 56 Chapter 3 Distributive Bargaining simply continue to seek another buyer, and for buyers the BATNA or b is the price at which they will look for another car to buy. If b is larger than s—that is, if the buyer’s maximum price is greater than the seller’s minimum price—then there exists a zone of possible agreement (ZOPA), also called the bargaining range, negotiating latitude, or settlement range because any offer outside of the range will be quickly rejected by one of the parties. The ZOPA exists because the buyer is willing to meet or exceed the seller’s minimum price.

However, the mere existence of a positive ZOPA does not guarantee that an agreement will be reached. After all, negotiators do not usually share with each other their reservation prices and thus may not realize that a range of possible settlement prices exists, and in fact they may not reach agreement if they are poor negotiators.

Also consider what happens if s is greater than b. Then the seller’s minimum acceptable price is higher than the buyer’s maximum price, and thus no ZOPA exists, and no agreement can be reached.4 The distributive bargaining situation can be represented as illustrated in Figure 3.1.

In Figure 3.1, the seller, of course, wants X to be the highest possible price, or as close as possible to b, and the buyer wants X to be the lowest possible price, or as close as possible to s. However, during negotiations both parties are only aware of two values: their own reservation price and the proposed value of X. So how do they negotiate a final price? Typically, in a distributive bargaining situation, they enter into the negotiation dance with one party making an opening offer, the other party responding with a counteroffer, and then possible multiple counteroffers, until an agreement price, X, is reached—which will be somewhere between the two reservation prices, within the zone of possible agreement.

An interesting finding by negotiation researchers is that all things being equal, such as the negotiation abilities of the two parties, each point in the ZOPA has an equal probability of becoming X, the final agreement price.5 In the real world, of course, all things are seldom equal. One or more of several factors may enable one party to negotiate a final price, X, that is more favorable to them and thus closer to their reservation price.

One critical piece of information that can provide a distinct advantage is the reservation price of the other side, or how eager the other party is to reach an agreement.

For example, a husband and wife are negotiating to buy a pleasure boat they found on the Internet. The seller listed the price as $35,000 in the ad—but, unknown to the buyers, has decided he will take $28,000 (reservation price). Upon inspecting the boat in person, the wife offers $25,000. The seller declines and the husband and wife begin haggling over the good and bad points of the boat. They discuss, in front of the seller, other boats they found online, and how far they would need to travel to inspect them. The husband keeps saying, “This is the nicest one we’ve seen.” The seller

–  –  –

Chapter 3 Distributive Bargaining

senses they are eager to make a deal, so he responds with: “I’m willing to come down to $33,000 if we can close the deal today.” The buyers counter with an offer of $32,000, which is accepted. The seller in fact is just as motivated as the buyers, if not more motivated, but their discussion gave him the sense they were very eager to buy—information that allowed him to lower his price by only $2,000 and gain a settlement price of $4,000 more than his reservation price.

Another important factor is the opening offer, which can often be critical in the negotiations that follow. In the example just cited, the seller’s opening offer was $7,000 above his reservation price and gave him room to negotiate downward, thus appearing to compromise. In his second offer he reduced his opening offer by $2,000 instead of raising their opening offer by $2,000, which would have been an equal movement. However by saying “I’m willing to come down” he based his counteroffer on his opening offer—a tactic that was critical to reaching a higher final price.

A third important factor is the skill of the negotiator. Negotiators who prepare in advance and successfully utilize commonly practiced negotiation tactics will reach agreements that are more favorable to them. The tactic that the seller used in our example was a simple but important one: He listened and learned about the circumstances of the other party. Experienced negotiators realize that careful listening to the other party during negotiations may enable them to determine the true interests of the other party, and thus give them valuable information. Negotiation scholar Kathleen L.

McGinn compares this important negotiation skill to that of improvisational jazz musicians who practice with other musicians for hours every day, listening carefully to notes, scales, chords, and progressions. After much practice they can begin to improvise to create exhilarating new music. Skilled negotiators, like jazz musicians, are to a degree improvisational because they “play it by ear” and skillfully listen to the interests, needs, and concerns expressed by the other party and then, based on that information, make adaptations in the negotiations to their advantage. McGinn

believes that negotiators can develop their improvisation skills by seeking out, recognizing, and then utilizing three types of information during a negotiation:6

1. Relational information: Facts, beliefs, and feelings about the relationships between the parties. For example, when asked “How can I trust that this is your best price?” a manager responded by showing the buyer his company price list. This information helped build a relationship as well as gain the sale.



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