negotiate an agreement with the first, and, if this fails, go on to the
second, and so on. There is no cost to approaching a new firm, but X
can negotiate with each firm only once. In any negotiation, the firms will
split equally the available total profit (if any). Here total profit is
measured relative to each side’s next-best alternative; for X, this
alternative is a deal with any supplier not yet tried.
Show that X’s optimal strategy is to approach C first, then B, then
A, if necessary. Do X and C reach an agreement? At what price? What
do your answers suggest about the benefits of competition?Discussion Question Traditionally, negotiation and litigation have been the
two prevailing methods of dispute resolution. These alternative methods lie at
opposite extremes of a spectrum. The negotiation process is private, voluntary,
informal, and unstructured, aimed at reaching a mutually beneficial agreement
involving only the parties themselves. The litigation (or adjudication) process is
public and follows formal rules whereby both sides of the dispute are heard and
a binding outcome is determined by a third party (judge or jury).
The last 20 years have seen increased use of alternative methods for
resolving disputes—mediation and arbitration in particular. In mediation, a
third party is engaged to help the parties reach a mutually beneficial agreement.
In arbitration, a third party hears the dispute and renders a binding decision.
a. Using available reference sources (in print or on the Internet), provide
summaries of the mediation and arbitration processes.
b. Provide a critical assessment of the advantages and disadvantages of each
method in reaching efficient agreements (and in terms of time and cost).
How do the methods compare to the alternatives of negotiation and
litigation?Spreadsheet Problem
S1. A U.S. firm (company U) is negotiating to buy aircraft engines from a
British firm (company B). Under discussion is the price to be paid (in
British pounds), quality (high or low), warranty (full or partial), and the
delivery schedule (two, three, or five years). The spreadsheet that follows
shows company U’s values in dollars and company B’s costs in British
pounds for possible agreements. For instance, delivery of high-quality
engines under full warranty in two years implies a cost (in pounds) to
company B of 68 10 £78 million. Company B receives £110 million
(cell H13) implying a profit of 110 78 £32 million (cell L13). In
turn, company U’s value (in dollars) for the deal is 238 18 $256
million. The exchange rate is 2 dollars for each pound. Thus, company
U’s final profit is 256 (2)(110) $36 million (cell K13).
a. Create a spreadsheet similar to the sample spreadsheet given. Put the
numerical value of 1 in cell C7, C9, I7, orI9, and put zeros in the664 Chapter 15 Bargaining and Negotiationc15BargainingandNegotiation.qxd 9/26/11 11:03 AM Page 664