L4 Slicing the pie

Question 1

What is the bargaining surplus?

Answer 1

The overlap between parties’ reservation points (the “pie” that has to be split / sliced)

Question 2

How can you predit how a bargaining surplus will be divided?

Answer 2

Using game theory and backward reasoning.

Question 3

How do you calculate the bargaining surplus taking into account the negotiators’ BATNAs?

Answer 3

Bargaining surplus (pie) = Amount to be negotiated - BATNA1 - BATNA2

Question 4

If both negotiators are “rational”, the pie will be split equally (50/50).

True / False

Answer 4

True

Although the negotiator that makes the last offer always gets slightly more.

Question 5

Who has the bargaining advantage in a take-it-or-leave-it offer negotiation?

Answer 5

The one that makes the last offer* and the one that has a better/higher BATNA (higher BATNA = higher bargaining surplus).

*When you make the last move / offer, the other party is normally “obliged” to accept your last offer even if you get a higher amount of the pie than them, because that’s better than no agreement / or agreement = 0€

Question 6

(Relative) advantage gets smaller as the number of operating days increases.

True / False

Answer 6

True

Question 7

Which are the Pie Slicing Strategies to maximize your share of the bargaining surplus?

Answer 7

#1: Assess and improve your BATNA
#2: Determine (but do not reveal) your reservation point
#3: Estimate other party’s BATNA and reservation point
#4: Set high but realistic aspirations
#5: Make the first offer (if you are prepared)
#6: Immediately re-anchor if other party opens first
#7: Plan your concessions
#8: Support your offer with facts
#9: Appeal to norms of fairness
#10: Do not fall for the “even split” ploy

Question 8

Explain the strategy #1: Assess and improve BATNA.

Answer 8

Nothing can help a negotiator more to get a bigger slice of the pie than having a GREAT BATNA.

The higher the BATNA = the higher the share of bargaining surplus.

It helps you know your bottom line (when to walk away*) and mitigate the influence of the counterparty (that will try to make their offer very appealing but if it is below your BATNA, then there is no deal)

• it tells you when to walk away, NOT when to sign (you can always get something better)

Question 9

Explain the strategy #2: Determine the Reservation point.

Answer 9

Determine your reservation point by quantifying your BATNA (what is my alternative worth?)

Don’t reveal your BATNA, even if you trust the other, because then they will give you just a little bit more when you could get much more from them without reaviling the information.

Don’t lie about your reservation point (integrity, ethics, saving face, and credibility is important in negotiations)
Also it is important to not lie about your threats (make a threat and then not doing it).

Question 10

In which two situations (exceptions) could you reveal or signal your BATNA?

Answer 10

1. Negotiating time is up and you are about to walk away, assuming that the bargaining zone is very small or even negative.
2. You have a great BATNA and agressive reservation point, and you want it to be matched.

Question 11

What could happen if you lie about your reservation price?

Answer 11

If you communicate a reservation price (lying) much lower than your actual reservation price, you can turn the Bargaining zone negative making the deal impossible because the reservation price of the other party is much higher that your “fake” reservation price.

Then, if you want to reach an agreement after that, you will have to admit your lie and accept his/her reservation price while “losing face” (that is, losing credibility and reputation)

Question 12

Explain the strategy #3. Estimate the other party’s BATNA

Answer 12

This can be done by under-researching the other party: who are they? are they monolithic*? Are there “hidden tables” (people that really make the decisions)? What are their interests? And their BATNA?

*rigid and homogenous, not open to new ideas

The other party would never reveal its BATNA, only its aspiration point, so you have to gather information & estimate their BATNA.

Question 13

Explain the strategy #4. Set high aspirations

Answer 13

High aspirations and target points lead to better and higher outcomes.

Chilling effect: extreme offers might offend the other party.

Goal setting paradox:

• Focus on reservation point: worse outcome, feel better
• Focus on target point: better outcome, feel worse

Question 14

Explain the strategy #5. Make the first offer

Answer 14

The first offer is an important anchoring point and it is correlated significantly with final outcomes.

People in negotiations estimate the value of unknown objects by starting from an initial anchor value and adjusting* from there.

An anchor can be based on relevant (as contracts) or irrelevant information (as random numbers). It can inhibit individuals from negotiating rationally (if it has no sense, misregard it)

Question 15

(example)
GROUP A: Based on your experience, does fraud happen in more than 10 of every 1,000 firms?
GROUP B: Based on your experience, does fraud happen in more than 200 of every 1,000 firms?

What would be the estimate of each group of the number of frauds per 1,000 firms? Why?

Answer 15

GROUP A: 17
GROUP B: 43

Reason: Anchoring and adjusting (after your first offer, normally you don’t get something much different because you start adjusting)

Higher initial number = higher estimate

Question 16

Explain the strategy #6. Immediately Re-anchor

Answer 16

In general, don’t accept the other’s pary first offer. Instead, make a counteroffer to show your willigness to negotiate and to counterbalance the anchoring effect of the first offer (adjust or “re-anchor”).

If their first offer is extreme, you need to re-anchor heavily.

Always plan your opening offer beforehand even if they make the first “move”, so you don’t get anchored to their offer.

Question 17

Explain the strategy #7. Plan your concessions

Answer 17

Concessions: reductions/additions (“adjustments”) during the negotiating process.

• Make few and small concessions
• Do NOT make immediate and premature concessions (patience is very important, give the other party time to consider you offer maybe s/he is happy with it and just needs time, not more concessions)

Question 18

Explain the strategy #8. Support your offer with facts

Answer 18

Present an objective and appealing reasoning for your offer, and make sure this facts cannot be easily counterargued (thus, be more informed than the other party).

Question 19

Explain the strategy #9. Appeal to norms of fariness

Answer 19

Making a reference to fairness usually gives you an advantage over the other party and will make them move to agree.

(example) It is not the same…
- Can you move to this price?
- Can you move to this price? It is pretty fair / I am out of time

Question 20

Explain the strategy #10. Do not fall for “even split”

Answer 20

Splits may look fair and altruistic, but it is not always the best thing to do.
They are often based on arbitrary values, or you may have a BATNA and a split would imply to agree something below it.

Question 21

What are the negotiation traps?

Answer 21

• Settling for too little
• Making too large concessions
• Rejecting an offer that is better than the alternative(s) you have
• Agreement bias: settling while you have better alternatives because you feel obligated to reach an agreement