9781118041581

Multiple-Issue Negotiations 641

though the member votes against his or her strict self-interest on the unim-

portant issue). This example illustrates a principle that is applicable to bar-

gaining in general:

In multiple-issue negotiations, as long as there are differences in the value (impor-

tance) parties place on issues, there will be opportunities for mutually beneficial

agreements of a quid pro quonature.

In multiple-issue bargaining involving monetary transfers, the key to the

attainment of efficiency is to structure agreements to maximize the totalvalue

the parties derive from the transaction. The logic of this result is quite sim-

ple. The transacting parties should form an agreement that maximizes the

size of the profit “pie” to be split. Then negotiation of an overall price for

the transaction has the effect of dividing the pie between the parties. Any

such division of the maximal total value is efficient; one side cannot gain

without the other side losing. In turn, any division of a less-than-maximal

total value is necessarily inefficient. An appropriately priced maximal-value

agreement delivers higher profits for both sides. We offer a concrete exam-

ple to illustrate this result.

A COMPLEX PROCUREMENT The Department of Defense (DOD) is in the

process of negotiating a procurement contract for aircraft engines with an aero-

nautics firm. The contract will specify the number of engines to be delivered,

the time of delivery, and the total price to be paid by DOD to the contractor.

The firm has assessed its total cost of supplying various quantities of engines by

different deadlines. For its part, DOD has assessed monetary values (its maxi-

mum willingness to pay) for different contracted deliveries. Table 15.1 lists the

parties’ costs and values.

Suppose DOD and the firm are considering a contract for 40 engines in

four years at a price of $39 million. Is this contract mutually beneficial? Could

both parties do better under a different contract at the right price? Of the

nine possible combinations of order sizes and delivery dates, which should

the parties adopt?

From Table 15.1, we find the parties’ profits under the 40-engine, four-

year contract ($39 million price) as follows: The firm’s profit is 39  36 $3

million; DOD’s profit is 42  39 $3 million. Clearly, this is a mutually bene-

ficial agreement. However, it is evident from the table that the parties can

improve on these contract terms. The value-maximizing contract calls for

80 engines to be delivered in three years. This contract offers a total profit of

85  70 $15 million. (This is just the difference between DOD’s value and

the firm’s cost.) At a $77.5 million price, each side earns a $7.5 million profit—

some two-and-one-half times the profit under the four-year, 40-engine agree-

ment. The three-year, 80-engine contract is efficient. All other contracts offer

lower total profits and, therefore, are inefficient.

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