«3 Chapter Distributive Bargaining T he negotiation model known today as distributive bargaining was first identified by R. E. Walton and R. B. ...»
2. Substantive information: Facts, pertinent data, and questions about the other party’s offer, utilizing reason and logic. For example, the seller of a house asked the buyers why their latest offer was an odd number ($183,256), when their previous offers were nice round numbers ($170,000 and $180,000). The buyers responded by showing the seller a form with their bank’s approved loan limit, saying “We really want this house, but this is the maximum amount the bank will loan us under their first-time-owner plan—if you can’t accept it, we have to keep looking.” The owner accepted the offer because she was convinced the form was legitimate and appreciated their sharing the information.
3. Procedural information: Open discussion of the negotiation process that helps understand and manage the process. For example, at the start of the annual round of labor contract negotiations between the city and nine unions, one 58 Chapter 3 Distributive Bargaining union president informed the city’s new chief negotiator, “Don’t bother setting information sessions with us—no matter what we tell our members, we are not in a hurry, and in fact will not engage in serious negotiations until the city has settled with all the other unions.” Then, true to his word, the union negotiator accepted the city’s opening offer that day but refused suggestions that they meet again—for 11 months, until the city had settled with all the other unions.
Once they did meet again, they settled on a new contract in less than 30 days.
By first explaining the process his union would follow, the president provided valuable procedural information that gave the city negotiator a realistic expectation of the process and helped maintain a positive relationship.
At this point we will expand upon the discussion of the two party, single-issue distributive bargaining situation presented in Chapter 2. The single-issue negotiation situation is the most common, and the one issue to be negotiated is usually price. As we discussed earlier in this chapter, both parties begin by determining their reservation prices. The next critical step is for one side or both sides to make an initial opening offer. Keep in mind that they are concealing their resistance points—defined as the seller’s minimum price (or BATNA) and the buyer’s maximum price (or BATNA). Experienced negotiators appreciate the critical importance of the opening offers. They realize that novice negotiators, such as the ones in the accompanying cartoon, may simply accept an opening offer and not really negotiate. Once opening offers are made the bargaining begins. Opening offers can easily determine the nature of the bargaining and greatly affect the settlement value.
Anchoring Opening offers can easily determine the nature of the bargaining and greatly affect the settlement value by effectively setting the outer limits of the bargaining. No Zits Inexperienced negotiators may simply accept an opening offer, or make a counteroffer that is very close—thus in reality “accepting” the opening offer of the other party.
Source: Zits is syndicated by King Features Syndicate, Inc. Used by permission.
Chapter 3 Distributive Bargainingbuyer will pay more than the asking price, and no seller will accept less than the buyer’s lowest offer. Therefore, many experienced negotiators often prefer to make the opening offer and thus anchor the discussion at their chosen point. Still other negotiators prefer to have the other party make the first opening offer. Once they have the other side’s opening offer they can adjust their own opening offer to keep their desired outcome in the middle of the two opening offers. Negotiation researchers have shown that people irrationally fixate on the first number put on the table in a negotiation—the offer becomes an anchor for the following negotiations, regardless of how arbitrary it may be. In fact, research shows that even when people know that the anchor has little or no relevance, it still influences their decision making.
This curious phenomenon is illustrated in Figure 3.2.
Experienced negotiators therefore know that the first offer on the table, especially in situations of great uncertainty, can substantially influence the other party’s perception of the ZOPA, and thus the outcome of the negotiation. Remember that in fact there are two ZOPAs—each side estimates the ZOPA based on its own reservation point and the reservation point it guesses has been set by the other party. If an opening offer causes the other party to change its perceived ZOPA, then the negotiator has anchored the bargaining in a most effective manner.
Negotiators often make opening offers with one of three types of anchors:7
1. Facts: “My agent told me no house in this neighborhood with this square footage has sold for more than $350,000.”
2. Extreme offer: “I believe highly experienced CPAs like myself can command a $95,000 salary in this region.”
3. Precedent: “My last supervisor always gave me the highest possible rating, in all 12 categories.” The first offer clearly anchors the negotiation discussions. Who, then, should make the first offer? By what mechanism does an anchor affect even experienced negotiators who believe they are immune to such influence? According to anchoring research
In an experiment on the effects of anchoring, Daniel Kahneman and Amos Tversky spun a wheel marked with random integers ranging from 0 to 100. Participants were then asked whether they thought that the percentage of UN member countries from Africa was greater than or less than the number just spun on the wheel.
Participants were then asked for their best estimate of the proportion of UN member countries that were from Africa.
For one group of the subjects, the wheel stopped at 10. The vast number of these subjects said that the proportion of the UN member countries that were from Africa was more than 10%; on average, they guessed that the actual percentage was 25%.
For another group of the subjects, the wheel stopped at 65. Almost all of these participants said that the proportion of the UN member countries that were from Africa was less than 65%. In contrast to the first group, this group’s average guess was that 45% of UN member countries were from Africa.
The only difference between the two experimental conditions was the number on the wheel, yet the groups’ best estimates differed by 20 percentage points! The purely random number the subjects were given by the wheel dramatically—and irrationally—anchored their assessments.
Source: Adapted from Daniel Kahneman and Amos Tversky, “The Power of Random Numbers,” Negotiation Vol. 7, No. 9 (2004): 10.
60 Chapter 3 Distributive Bargaining by Adam D. Galinsky of Northwestern University, the answers can be found in the fact that all items on the table have both positive and negative qualities, and a high anchor may direct the negotiators’ attention to the positive qualities. In addition, those making the first offer are more likely to have confidence in their position. By contrast, the lack of an aggressive first offer to anchor the discussions leaves you with only two unappealing options—make small concessions to the other party’s opening offer, or stand by your positions and appear to be uncompromising.8 And a word of caution: If the other party begins with an extreme opening offer, it may be a trap (see Box 3.1).
Bracketing Once the opening offers are made the real haggling process, often called bracketing, occurs. Bracketing is the logical bargaining process of moving toward a middle point between the opening offers, or brackets.9 Consider, for example, the negotiation described in the Chapter Case, “Buying a Work of Art,” as illustrated in Figure 3.3.
The seller listed the price at $12,500 and the buyers approached the seller with an opening offer of $7,500. The two sides then began bargaining in the bracket range between the opening offers ($7,500–$12,500). In general, negotiators should “bracket” their initial offer, or initial counter, about the same distance away from
BOX 3.1 Traps to Avoid How to Respond to an Extreme Opening Offer
How should you respond to an extreme opening offer—which might set an anchor in favor of the other party? Keep in mind that an unrealistic opening offer is often simply a tactic employed by the other side, not an insult. The other party simply is trying to lower your expectation, and in the process establish its extreme offer as an anchor point. Negotiators are especially likely to use this tactic if they believe you may end up agreeing to split the difference between your reasonable offer and their extreme offer. Thus you should first recognize their extreme offer for what is it—and quickly dismiss it with a response such as “Outrageous!” or “Ridiculous—$11,000 is not in the ballpark!” The goal is to get them to abandon the possibility that their offer will be considered at all in the ensuing negotiations. Then quickly follow up with your own opening offer based on facts or a defensible position. For example: “The Blue Book on this vehicle is $18,500, and that is for a car in average condition. This one has low mileage and is in excellent condition, so I believe $20,500 is a fair price. Now what is your offer?” With this response, you accomplished two important objectives—first, you dismissed their extreme offer, effectively removing it as a potential anchor, and then you focused the discussion on your price by basing your offer on facts.
Source: Roger Fisher, William Ury, and Bruce Patton, Getting to Yes, 2nd ed. (New York: Penguin Books, 1991), 138–140.
their desired price (in the opposite direction, of course) as the offer made by the other party.
Bracketing can be used in small deals and large deals. For example, Roger Dawson suggests that if a car dealer is asking $15,000 and you want to pay $13,000, make an opening offer of $11,000. Dawson also cites an example of how bracketing was used in a large deal—the 1982 international loan between the governments of Mexico and the United States. The two sides first agreed that Mexico would pay off its $82 billion loan with oil. Then Federal Reserve Chairman Paul Volcker and Treasury Secretary Donald Regan asked Mexico to pay a $100 million negotiating fee—which is a politically acceptable way of paying accrued interest. Mexico’s President José López Portillo balked at the idea and said he would not pay any negotiating fee—zero dollars. Thus he bracketed the deal with his “zero dollars” counter, and the two sides agreed to a fee of $50 million.10 Thus if the other side makes the first offer, a good response strategy is to bracket the negotiation, and possibly end up splitting the difference, as is often the case, and therefore getting your desired objective. That is why some negotiators, when they believe the other party is inexperienced, want the other party to make the first offer—so they can bracket the negotiation. Real estate agents, when counseling clients, commonly apply bracketing. For example, a house is listed for $370,000 and potential buyers ask their agent, “What offer should we make?” They already told the agent they don’t want to go over $350,000 on any house. Thus the agent responds, “Offer them $330,000, and let’s hope they counter with $360,000. and then you can counter with $350,000.” In the Chapter Case, if the buyers’ goal is to purchase the painting for no more than $9,000, then instead of an initial offer of $7,500 they should make a more extreme opening offer of $5,500—creating a midpoint of $9,000. Both sides have already decided their reservation price or BATNA; the seller will not accept less than $8,000, a minimum profit on the item (s), and the buyers decided that $11,000 is their absolute limit (b) to spend on any item. Obviously, in most negotiations, both sides do not reveal their reservation prices. The distance between the two therefore becomes the ZOPA because any agreed-to final price will be between these two points, which are the limits each party has determined.
62 Chapter 3 Distributive Bargaining The final negotiated settlement price (X) usually will be a point approximately in the middle of the two opening offers (if each side accepts the other’s opening offer as reasonable), because although the opening offers are known, the reservation prices have not been revealed. In the Chapter Case example, for instance, the midpoint is $10,000. If the final price is larger than the midpoint, say $11,000, then the seller perceives a “negotiated gain” of $3,500 and the buyers perceive a “negotiated gain” of only $1,500. (The seller would have haggled for $3,500 more than the buyers’ opening offer of $7,500, but the buyers would have realized only a $1,500 drop from the seller’s opening offer of $12,500.) Neither wants to realize a smaller negotiated gain than the other side, and thus both sides often move to a price near the midpoint.