occurs is a matter of competition: The buyer prefers a low price, the seller a
high price. In the negotiation literature this situation is called a distributivebar-
gain because the parties can be thought of as bargaining (via price) over the
distribution of the total profit (in this case, $80,000) available from the trans-
action. The actual price they negotiate depends in part on the bargaining abil-
ities of the parties and on notions of equity and fairness. For instance, a final
price in the vicinity of $560,000 (implying $40,000 in profit for each side) might
be negotiated by equally matched bargainers who are in agreement that the
total bargaining profit should be divided equitably. For the moment, however,
our analysis has identified the zone of agreement without offering a predic-
tion of which price within this zone will be the agreement terms.
Two additional points can be drawn from the example. First, the source
of the trading gains is the difference in the parties’ values. Because the seller’s
value for the warehouse and items is less than the buyer’s value, completion
of the transaction creates a trading gain that both sides share. In contrast, if
the agent values were reversed (i.e., the seller’s value was $600,000 and the
buyer’s value $520,000), no mutually beneficial transaction would be possible.
Second, the values or reservation prices of the parties are influenced by the
alternative transactions available to them. In the present circumstances, for
instance, the buyer estimates the monetary value for the warehouse at
$600,000. Clearly, if the buyer learned of the availability of another ware-
house at a comparable location at an unexpectedly low price, its walk-away
price for the current transaction would fall markedly. Similarly, if the buyer
revised downward its estimate of the potential profit from the warehouse
operation (because of adverse economic conditions in general), its walk-away
value also would fall. Of course, the importance of outside opportunities per-
tains equally to the seller. In short, the alternative transactions available to the
parties directly or indirectly set the respective walk-away prices between which
negotiated agreements can occur.634 Chapter 15 Bargaining and NegotiationCHECK
STATION 1In the 1980s, Harper & Row Company made a phenomenal profit as the hardcover pub-
lisher of In Search of Excellence,one of the first blockbuster business books. Warner Books
held the rights to release the book in paperback—rights that were to begin in November- Prior to that date, Harper & Row and Warner entered into negotiations to postpone
the paperback release until April 1984. After lengthy discussions, they concluded the deal
at an undisclosed price. What was the basis for this mutually beneficial agreement?
Resolving Disputes
As we have seen, negotiation is a frequent means of securing new transactions. It
also plays an essential role in dispute resolution. Examples include management-
labor negotiations, international negotiations, conflicts between governmentc15BargainingandNegotiation.qxd 9/26/11 11:03 AM Page 634