can be said of bargaining: Under imperfect information, a certain amount of
dissembling, playing one’s cards close to the vest, is essential. Otherwise, one
is prone to the danger of being read like an open book by an opponent.Repetition and Reputation
Thus far, we have focused on a one-time negotiation between a pair of inter-
ested parties. As a natural consequence, the parties’ bargaining behavior has
been motivated solely by the immediate profit available from an agreement.
Now let’s consider the effect if one or both parties are expected to face differ-
ent bargaining situations repeatedly. For instance, labor contracts typically are
no longer than three years. Thus, even when the current contract is signed and
sealed, labor and management are well aware they will be negotiating a new
contract in two or three years’ time. Alternatively, one side may find itself
repeatedly negotiating with scores of different parties over time. As an exam-
ple, representatives of insurance companies negotiate hundreds of tort and lia-
bility claims each year.
Repeated negotiation (with the same or different parties) introduces the
key strategic element of reputation; that is, the firm recognizes that its behavior
in the current set of negotiations can influence the expectations of its future bar-
gaining partners. In a one-time bargaining setting, in contrast, the firm’s actions
are motivated solely by immediate profit; issues of reputation do not enter.
One important effect of reputation formation in repeated negotiations is
to limit the scope of purely opportunistic behavior. To illustrate, consider cur-
rent contract negotiations between two firms, A and B. Due to many bargain-
ing factors in its favor, A is confident it can negotiate a contract giving it 90
percent of the total profit from an agreement. If it expects never to bargain
with B again, A surely will push for these favorable terms. But what if B and A
are likely to bargain with each other over many subsequent contracts?
Negotiating too good a contract poses the risk of souring the entire bargaining
relationship. (Perhaps B would spurn A and seek out a new bargaining partner
in the future.) Accordingly, A may rationally choose not to take full advantage
of its short-term bargaining power.
Reputation effects also suggest that B, the weaker bargaining party, may
be unwilling to concede the lion’s share of the short-term gain to A. In a one-
shot bargain, accepting 10 percent of something is better than nothing. But in
repeated bargaining, B must be concerned about its reputation. Large con-
cessions now may spur the other party to take a tougher bargaining stance in
the future. Thus, B has an interest in establishing a reputation as a tough but
fair bargainer. Sometimes this reputation effect means sacrificing or delaying
short-term agreements. For instance, strikes frequently occur because one or
both sides seek to establish their long-term reputations. Insurance companies
typically take a tough stance toward settling claims of uncertain merit. Viewing652 Chapter 15 Bargaining and Negotiationc15BargainingandNegotiation.qxd 9/26/11 11:03 AM Page 652