should always agree to a settlement to avoid the legal costs of going to court. The
results are quite the contrary. Invariably, the plaintiff sees a much greater court
award than does the defendant—on exactly the same evidence. One’s predic-
tion is biased (consciously or unconsciously) by one’s self-interest. Therefore,
disputants in these experiments frequently litigate and incur the associated court
costs. A second source of missed agreements occurs when there are multiple
mutually beneficial bargaining equilibria. Recall the conflict over the standard for
high-definition DVDs described in Chapter 10, Table 10.4. For years, each side
adamantly held to its preferred incompatible format, severely impeding adoption
of either new technology. Here, the problem was a failure to agree on either equi-
librium. Third, notions of fairness can aid or impede agreements. On the one
hand, the fairness of a transparent 50-50 split can offer an obvious point of agree-
ment. On the other, there might be many possible candidates for a fair agree-
ment, among which the bargainers disagree. Suppose that agreement A is one
such agreement candidate that both sides prefer to their disagreement outcomes.
Nonetheless, it is not unusual for bargaining to end in disagreement, simply
because one side finds agreement A unacceptable on grounds of fairness.
Finally, as we have noted, when bargainers hold imperfect information, self-
interested negotiation behavior leads to missed agreements, at least some of the
time. Thus, some frequency of disagreements should not be surprising in set-
tings where each side has only partial information about potential agreements.
Indeed, other means of dispute resolution such as mediation and arbitration
are sometimes invoked to facilitate the prospect of reaching an accord. To sum
up, bargaining is a valuable, but not perfect, means of reaching agreements.654 Chapter 15 Bargaining and NegotiationTexaco versus
PennzoilFrom 1984 to 1987, the dispute between these two oil companies set a gusher
of records, including the largest court award in history, the largest bankruptcy
filing, ultimately the greatest settlement, and collectively an unprecedented
amount of legal expenses. The dispute arose from a takeover battle in which
Texaco acquired Getty Oil, a move that allegedly wrecked a planned Pennzoil-
Getty deal. Seeking damages, Pennzoil filed a lawsuit against Texaco, and thus
began the first of many rounds of settlement negotiations. Following are some
of the important company decisions (as well as key court outcomes) that took
place during the protracted negotiations:
January 1984.Pennzoil offers to withdraw the lawsuit in exchange for the
right to purchase 37 percent of Getty. Texaco refuses.
November 1985.A Texas jury awards Pennzoil $10.5 billion from Texaco.
December 1985.Texaco offers to sell 42 percent of Getty. Pennzoil refuses.
January 1986.Texaco offers to take over Pennzoil, paying $83 per share.
Pennzoil angrily refuses.
February 1987.A Texas appeals court upholds all but $2 billion of the
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