- The zone of agreement lies between the parties’ values for the
transaction (assessed relative to what each would get in a disagreement).
In terms of negotiation strategy, the amount of profit one side can claim
from an agreement depends on an assessment not only of its own walk-
away value but also that of the other side (because this sets a limit on the
other side’s ability to compromise). - Negotiations involve a mixture of competition and cooperation. They
are as much about value “creating” as value “claiming.” An efficient
agreement maximizes the parties’ total value from the transaction.
Value is created by trading on differences. Parties should adopt an issue
as part of an agreement, provided the benefits to one side exceed the
costs to the other.
Nuts and Bolts
- Mutually beneficial transactions are based on differences in bargainer
values. In single-issue transactions, the difference between the
bargainers’ reservation prices determines the total profit available from
an agreement. Differences in values can result from differences in
preferences, probability assessments, or attitudes toward risk. - An outcome is efficient if there exists no other alternative that is better
for both parties. The payoff frontier shows the set of efficient
agreements. For any movement along the frontier, any gain for one
bargainer necessitates a loss for the other. - When monetary transfers are freely available, an agreement is efficient if
and only if it is value maximizing, that is, generates the greatest total
profit to the bargainers together. The size of the transfer determines the
distribution of the total profit between the bargainers. - Under perfect information, rational bargainers always should achieve an
efficient agreement. Moreover, any agreement on the payoff frontier
(provided it is preferred by both parties to a disagreement) can be
supported as an equilibrium bargaining outcome. - In bargaining settings under imperfect information, optimal bargaining
behavior may preclude the attainment of efficient agreements. For
instance, disputants will prefer to incur the cost of going to court if the
difference in their litigation expectations exceeds their collective court
costs. In simple price bargaining, a buyer strategically understates its true
value, while the seller overstates its value (or cost), with the result that
mutually beneficial agreements may be lost. Similarly, strategic
considerations in multiple-issue negotiations can prevent the attainment
of value-maximizing agreements.
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