9781118041581

Negotiation Strategy 649

is one from which at least one of the parties, and probably both, would

have been willing to retreat for the sake of agreement, and very often

the other side knows it. Any potential outcome is therefore one that

either party could have improved by insisting; yet he may have no basis

for insisting, since the other knows or suspects that he would rather

concede than do without an agreement. Each party’s strategy is guided

mainly by what he expects the other side to insist on; yet each knows

that the other is guided by reciprocal thoughts. The final outcome must

be a point from which neither expects the other to retreat.^8

To put this another way, any set of terms falling inside the zone of agreement

can be supported as an equilibriumoutcome. As an example, consider two par-

ties bargaining over the division of the total profit from a mutually beneficial

transaction. Bargaining takes place in the simplest possible way: Each side

makes a singleoffer, naming his or her share of the total profit. If the offers are

compatible (i.e., they add up to less than 100 percent of the total profit), there

is an agreement (each party getting his or her offer); otherwise, there is no

agreement. Here any pair of offers summing to exactly 100 percent constitutes

an equilibrium. For instance, offers of 50 percent each are in equilibrium.

Neither side can profit by (1) demanding more, because this leads to a dis-

agreement and zero profit, or (2) demanding less, because this directly lowers

his or her profit. In turn, the offers 80 percent and 20 percent (or any other

pair of compatible offers, no matter how inequitable) are also in equilibrium.

The cold truth is that, against an opponent whose nonnegotiable demand is for

80 percent of the profit, the best one can do is settle for the remaining 20 per-

cent. To sum up, any division of the profit (equitable or inequitable) is an equi-

librium outcome.

Via the dynamic process called bargaining, parties will arrive at some final

outcome. But the multitude of equilibrium outcomes makes it difficult to pre-

dict which one. Clearly the final outcome depends significantly on the bar-

gainers’ expectations—expectations that are modified via the exchange of

offers and counteroffers during the negotiations. In some sense, bargaining

ceases when expectations converge, at a point where neither side can expect

the other to concede further. Then either an agreement is signed or, if the

sides stubbornly hold to conflicting expectations, a disagreement results.

Perfect Information

If both sides have perfect information—that is, there is no uncertainty about

the economic facts of the negotiation—profit-maximizing bargainers always

(^8) T. C. Schelling, The Strategy of Conflict(Cambridge, MA: Harvard University Press, 1990).
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